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CH4: ISLAMIC MICROECONOMICS (Theory of production in Islam (Factors prices…
CH4: ISLAMIC MICROECONOMICS
Theory of production in Islam
Manan 1986
Production means human efforts to make the existing goods useful & beneficial to them
Argued that economic welfare is about income growth due to increases in the production of useful products by using optimum resources
Objective of productions
Improve the material condition of an individual
Improve his Moral/Morality
It also a way of attaining his goal in hereafter life
Importance of production
To fulfill Allah's commandment that man needs to make effort & work
To support & fulfill the needs based on priorities which one's needs, family's need, future needs, fisabilillah.
Fulfiling the needs of national development & ummah
Factor of productions
Land
Islam has recognized land as one of the most important factors of production
Land is not referring to land and soil only
It is synonymous to natural resources available which yield income or useful produce
Land is needed by man either for habitation or for the purpose of earning livelihood through its cultivation
Characteristic of land > fixity and countless variety
If land is not used by the owner, it can be given to relative without any charges or can
be rented to others who willing to pay, BUT BETTER FOR THE OWNER GIVE THE LAND FREE OF CHARGE TO HI
Labour
In Islam, it refer to the mean to extract most of the goods from the
earth by labour (human effort) who are sane and healthy.
The relationship of employer and employee are also stretched out in Islam,
as both should treat each other according Al-Quran.
Labour cannot be separated from the worker, so work environment becomes important.
The reward given to the labour is not only monetary term
(wages), but also the good deeds in the hereafter.
Hadith Riwayat Ibn Majah – the wages must be paid immediately before his sweats dry out.
In Islam, a person cannot freely do so. He is not permitted to get involved in prohibited jobs as stated in shariah.
Capital
It is the wealth which assist in the production of further wealth.
It includes all those goods which are produced not
for consumption but for use in future production.
Use of the capital (equipment, wealth ,etc) must be in accordance to al-Quran and as-Sunnah.
Riba must be prevented from imposing bad
impacts on employment, production and allocation.
It is not “interest” but “profit” that has been considered as the “reward” for capital
Entreprenuership -
Business always fluctuate sometimes violently. But most want stable income
Entrepreneur is regarded as part of “ibadah”
as it aims to achieve the blessing of Allah. Every deed is count towards the blessing of Allah.
Muslim are encouraging to earn living from sources
that are permitted or ‘halal’ and spend it wisely for benefit to all.
Islam encourages its people to enjoy life - business is one of the ways.
However, Islam places some guidelines in order that everything done is always blessed by Allah SWT.
Factors prices in Islam
Ujrah -
Broad name for rents
Rent of human services called ‘wages’
Fixed, known in advance
Positive and determined by supply and demand
Profits
Gain or loss
A reward for visualizing
a profitable productive venture and bearing the risk
Pricing of labour
Minimum Wage : cover basic necessaries of life.
Maximum Wage : equal to what they have contributed to the production .
Based on principles : JusticeScarcityHumanityEquity
Work, wage, duration must pre-determined
Nature of work must be legal.
Pricing of physical assets
2 kinds of pricing
Pricing towards physical assets; depends on market force
Pricing towards service of physical assets; relevant in current condition
Pricing of capital & entrepreneurship
Islam encourage financial partnerships such as;
Mudharabah (profit-sharing) one person does business with money supplied by another, both sharing profit in agreed ratio, loss being borne by the capital provider alone.
Musharakah (profit-loss-sharing) both party provide capital and engage in management side, both sharing profit and loss according to pre-agreed ratio.
Cost & Profit
Explicit Cost /Visivle cost are real cost paid by the firm for production inputs. For examples, wages,cost of raw material, transportation cost, & fuel cost
Implicit Cost/hidden cost are all payment made to the firm fro example rent for land &building owned by the firm
Short run production cost
The long run is the period of time in which all factors of production & cost are variable
In the long run, firms are able to adjust all cost, whereas, in the short run, firm are only able to influence prices through adjustment made to production levels.
Long run production cost
Division of labour and specialization
Firm has to expand output because of expanding demand its product it can divide the work in simpler sub processes and can use more of machines for doing different job.
Advantages of bulk buying and selling
In large scale production raw materials, spares, stores fuel can be bought in large quantities from suppliers at cheaper prices. In fact, firms may produce their own material.
Reduction in transportation cost
Large firms can hire more transport capacity in one transaction. Get better terms from the shippers, insures, clearing agents and etc.Large firms may and do have their own transport systems to bring in materials and fuel and distribute their product to the retailers.