Fundamental Concept of Supply, Demand
and Price, Organization Economic Theory
and Market Conditions for Perfect
Competition to Monopoly
Wan Mohd Firdhaus B. Wan Zamri
Faculty of Electrical Engineering, Universiti Teknologi MARA, 40450 Shah Alam, Malaysia
Email: frdhs95@gmail.com
Abstract – In this topic we shall discuss about the
engineering economy by its general definition and
description. The purpose of this research is to gain more
knowledge and information about the world of economy
instead of engineering subjects along the path to become
an engineer. The engineer need to solve all the problems
in the society by applying all the engineering knowledge
and creatively thinking the way to solve it. Comparison
between supply and demand including price will give
more understanding about the relationship of the
concepts. If the product is supplied less from the industry
with more demand from the people, then the price will
be increase.
Keywords – Macroeconomic, Microeconomic, Supply,
Demand, Price, Market
I. INTRODUCTION
Engineering economy is about determining the economic
factors and the economic criteria utilized when one or
more alternatives are considered for selection. As a
discipline, it is focused on the branch of economics known
as microeconomics in that it studies the behavior of
individuals and firms in making decisions regarding the
allocation of limited resources.
Macroeconomics looks at the total output of a nation and the
way nation allocates its limited resources of land, labor and
capital in an attempt to maximize production levels and
promote trade and growth for future generations. It also
defines as the branch of economics that studies the behavior
and performance of an economy as whole. Macroeconomic
also focuses on the aggregate changes in the economy such
as unemployment, growth rate, gross domestic product and
inflation.
Microeconomics is the study of individuals, households and
firms' behavior in decision making and allocation of
resources. It generally applies to markets of goods and
services and deals with individual and economic issues. It
also deals with what choices people make, what factors
influence their choices and how their decisions affect the
goods markets by affecting the price, the supply and
demand.
Next, supply and demand are related to each other and key
to economic activity. The two influence each other and
impact the prices of the consumer goods and services within
an economy. Supply can be defined as the amount of goods
or services available at given time to consumers. Demand is
a measurement of consumer desire and consumer spending
on a particular good or service at a specific price.
According to the Investopedia, organization economic
theory is the branch of applied economics that studies the
transactions that occur within individual firms, as opposed
to the transactions that occur within the greater market.
Organizational economics is broken down into three major
subfields: agency theory, transaction cost economics and
property rights theory. Courses in organizational economics
are usually taught in the degree until doctoral level.
Finally, monopoly is defined as an industry where there is
only a single seller whereas the firm and industry are one and
working together. It could be worrisome to other people if
there is a complete monopoly but it could be not make any
sense because all other products are also compete for
consumers’ limited income. So it is hard to achieve for the
competitor, a perfect condition for the competition of market
and pure monopoly.
II. OBJECTIVES OF RESEARCH
It is critical for any engineer to have some basic knowledge
and information about the world of economy so that they can
also become one of the economists of their own in the
company or any organization. Without these knowledge, it
will be difficult for the engineers to compete with other to
achieve a perfect condition in market of engineering world.
The purpose for this study is to be able and understand how
the economy is working in terms of engineering world. Next,
is to be able solving the problem regarding the engineering
economy such as managing the budget and to survive in this
nowadays challenging world.
III. PROBLEM STATEMENT
Inflation is the rate at which the general level of prices for
goods and services is rising and consequently the purchasing
power of currency is falling. Consumer prices in Malaysia
increase 3.7 percent from a year earlier in August of 2017,
compared to 3.2 percent rise in the that month. It was the
highest inflation rate since May, as cost went up more for
foods, transport including housing. [1]
Figure 1: Graph shows the Malaysian Inflation Rate
Meanwhile for microeconomic the problem that people face
is when to rent an apartment, the buyer need to determine
how much budget do they need to invest. For this part, the
buyer will have to take into account their salary income and
how much money are looking to spend on housing, in such
a way to maximize utility or satisfaction. If the buyer spend
too much income to rent, they will not have a lot of money
left for other expenses. Thus, the buyer will have to decide
what is the most amount of money that they are willing to a
part with, what amenities that must have in the apartment,
and acceptable neighborhoods. It is all about maximizing
utility.
For the concepts of supply and demand, if the demand is
increases, available supply decreases and an increased
supply may satiate available demand at that price. Prices
may fall if supply continues to grow. If supply decreases,
prices may continue to increase. Supply and demand have an
important relationship that determines the prices of most
goods and services. Many companies analyze this market
relationship while making strategic production decisions.
Figure 2: A supply and demand diagram, illustrating the effects of
an increase in demand.
IV. LITERATURE REVIEW
To overcome this inflation problem, one popular method of
controlling inflation is through the monetary policy. The
purpose is to reduce the money supply within an economy
by decreasing bond prices and increasing interest rates.
Monetary policy is how the central bank which is Bank
Negara Malaysia manage the liquidity to create economic
growth. Liquidity is how much there is in the money supply,
includes credit, cash and money market mutual funds.
Instead of monetary policy, there is one more policy and it
is related to the national government which is fiscal policy.
The difference between monetary policy and fiscal policy is
monetary policy is concerned with the management of
interest rates and supply money in circulation. Meanwhile,
fiscal policy is the collective term from the taxing and
spending actions of governments. [2]
Example for the concept of demand is a new restaurant opens
up in the town and gets great review from the customer but
they only have 10 tables in the restaurant. Many people want
to eat at that restaurant so the demand for the reservation is
increase. Example for the concept of supply is when Durian
season comes, there are many Durians are sell at the market
and price is quite cheap. Other than its season, the Durians
are being sell expensively because of its availability is
decreasing because of the rate production of Durians from
the tree is going down.
A company producing electronic parts sets the price of their
product at RM10.00. Since there is no one wants the product,
so the price is lowered to RM9.00. Demand for the product
increases at the new lower price level and the company
begins to make money and a profit from it. The company
could lower the price to RM5.00 to increase demand even
more, but the increase in the number of people buying the
product would not make up money lost when the price level
was lowered from RM9.00 to RM5.00. The company leaves
the price set at RM9.00 because that is the market level at
which supply and demand are in equilibrium level. Raising
the price would reduce demand and make the company less
profitable, while lowering the price would not increase
demand by enough to make up the money lost.
According to Oliver E. Williamson, transaction cost
economics (TCE) is concerned with the allocation of
economic activity across alternative modes of organization
(markets, firms, bureaus, etc.), employs discrete structural
analysis, and describes the firm as a governance structure
(which is an organizational construction). Real differences
notwithstanding, orthodoxy and TCE are in many ways
complements—one being more well suited to aggregation in
the context of simple market exchange, the other being more
well-suited to the micro analytics of complex contracting
and nonmarket organization. [3] A property right is the
exclusive authority to determine how a resource is used,
whether that resource is owned by government or by
individuals.
 IV. MARKET CONDITIONS FOR PERFECT COMPETITION TO
MONOPOLY
REFERENCES
According to Richard G. Lipsey, perfect competition is a
market form which exists where there is a homogenous
product, many sellers, perfect information and freedom of
[1] C. C. Manan, "Trading Economics," Department of Statistics
entry into and exit from the industry. [4] Malaysia, 20 September 2017. [Online]. Available:
https://tradingeconomics.com/malaysia/inflation-cpi.
The structure of the market is determined by four different
market characteristics.
[2] P. E. Kennedy, Macroeconomic Essentials: Understanding
Economics in the News, London: The MIT Press, 2017.
 The number and size of the firms in the market.
 The ease with which firms may enter and exit the [3] C. Menard and M. M. Shirley, Handbook of New Institutional
market. Economics, Heidelberg, Germany: Springer, 2005.
 The degree to which firm’s products are differentiated
and the amount of information available to both [4] C. Harbury and R. G. Lipsey, First Principles of Economics,
buyers and sellers regarding prices. London: Oxford University Press, 1992.
 Product characteristics and production techniques.

Four characteristics or conditions must be present for a

perfectly competitive market structure to exist.

 There must be many firms in the market, none of

which is large in terms of its sales.
 Firms should be able to enter and exit the market
easily.
 Each firm in the market produces and sells a
nondifferentiated or homogeneous product.
 All firms and consumers in the market have complete
information about prices, product quality and
production techniques.

Three conditions characterize a monopolistically

competitive market:

 The market has many firms, none of which is large.

 There is free entry and exit into the market, there are
no barriers to entry or exit.
 Each firm in the market produces a differentiated
product.

V. CONCLUSION

In a nutshell, engineering economy is all about how the

world runs the economy in terms of engineering point of
view. The organizational economic theory was developed to
give greater significance to the role of management in
marketing organizations. Supply and demand is crucial in
the economic world as they play important role in
controlling the equilibrium of the market flow. In the
organizational economic theory, we already discussed about
these two theories which are transaction cost economics and
property right theory. To achieve the perfect condition of
market, there are four characteristics that need to be
determine. We also able to differentiate the difference
between the monetary policy and the fiscal policy in problem
statement section.