CHAPTER 6:

ISLAMIC
MICROECONOMICS
 DEFINITION OF
MICROECONOMICS
• Economics is traditionally studied in two dimensions: microeconomic
and macroeconomic. The study of how individual firms and households
take economic decisions is called microeconomics, whereas the study of
a country’s economy with respect to the collective outcome of decisions
of all households and firms is called macroeconomics.

• Microeconomics studies the behaviour of individual economic agents.

Economic agents are traditionally known as ‘households’ who demand or
consume goods and services, and ‘firms’ that produce or supply goods
and services to meet the demands of households.

• Microeconomics is conventionally defined as the behavioural studies of

individuals and firms in making decisions regarding the allocation of
scarce resources and the interactions among these individuals and firms.
 ISLAMIC
MICROECONOMICS
Islamic microeconomics is a branch of Islamic economics that
studies the behaviour of individual economic agents within the
institutional framework of Islam.

• Islamic microeconomics studies the economic decisions of

households and firms which aim to pursue their self-interest and
maximise their utility and profits respectively.
• Also studies the economic activities that seek to benefit the
collective interests of society for the sake of divine pleasure only.
Conventional microeconomics often disregards this aspect of
economic behaviour of economic agents, considering it a
philanthropic activity rather than an economic activity.
 ISLAMIC
MICROECONOMICS
Two Dimensions For Consideration In Islamic Microeconomics

• First, households and firms undertake economic activities to

pursue their self-interest and to interact with one another to
increase their wealth through market exchange.

• Second, households and firms generate economic activities to

meet the needs of the less privileged people and the environment.
The activities in this dimension are often referred to as the
voluntary or third sector in the Islamic economic literature.
 SCOPE OF MICROECONOMICS

• In microeconomic analysis, two key economic agents are always

mentioned, namely, households and firms. Households are the
consumers or individuals and firms are the producers.
• The scope of microeconomics—whether Islamic or conventional
—is limited to individuals, firms, small groups or a specific
industry. Microeconomics is not concerned with dealing with
activities at the aggregate economy level.
• The scope of microeconomics covers analysing the behaviour of
economic agents and the market mechanisms that establish
relative prices among goods and services, and allocate limited
resources among alternative uses.
 SCOPE OF MICROECONOMICS
Microeconomics tries to answer the following key questions at the
individual or firm level:

 What shall we produce?

 What shall we consume?
 To whom shall we distribute?
 What type of market structure shall we have?

Islamic microeconomics covers the same areas discussed under

conventional economics. This includes the following key areas:
Demand, supply and equilibrium – Measurements of elasticity –
Consumption – Production – Distribution – Market structure.
 SCOPE OF MICROECONOMICS
Key Differences Between Islamic And Conventional Microeconomics

 Firstly, the normative elements have a greater role in Islamic

economics as compared to conventional economics.
- positive economics (what is), normative economic (what ought to
be)

 Secondly, while the emphasis of Islamic economics is on the role of

the third sector and activities outside the market and efforts made to
integrate them in the analysis, conventional microeconomics analysis
does not focus on integrating these activities in the models and often
regards them as philanthropic activities.
 POSITIVE AND NORMATIVE
STATEMENTS
• Human behaviour is composed of positive and normative elements.
positive statement is when one says: 'human beings spend x amount of
money on food consumption’,
normative statement is when one says: ‘human beings should not
consume more than what is needed’.
• Positive statements are value-neutral, while normative statements are
value-based.
• If economists ignore the normative aspect, they will end up developing
economic theories which are neither realistic nor relevant to many
religions, societies and cultures.
• The fact that microeconomics from an Islamic perspective includes
analysis of normative elements does not mean it ignores the positive
elements, nor denies its status as a science.
 THE MARKET AND ISLAMIC
MICROECONOMICS
• Islam approves markets in the economy and recognises their significance in
improving human well-being.
• Islam provides a legal framework to establish a fair, harmonious and peaceful
environment for markets to function.
• Islam gives an elaborate set of rules to ensure that markets are free and
efficient to give everyone an opportunity to compete in the market.
• Although the demand-supply model explains how the market ensures that
supply matches demand, this model is not enough to explain all the economic
activities that are conducted in an economy within the Islamic perspective.
• The missing part is the exchange and economic activities that do not take
place in the market, whereby recipients do not pay a price for the goods and
services they receive, and givers do not claim from recipients any price for
the goods and services they give away, and where the gain is not considered a
‘material gain’. This happens in the third sector.
 THE THIRD SECTOR AND ISLAMIC
MICROECONOMICS
• The obligatory as well as voluntary economic activities are
recognised in Islamic economic literature as the third sector (or
voluntary sector) of an Islamic economy.

• Khan (2017) suggested recognising the third market activities

separately in the Islamic economic model as beyond the market
activities in contrast to exchange in the market.

• With the recognition of the third sector in the analysis of

microeconomics, the Islamic perspective synchronises the concern
for efficiency with the concern for equity and sharing of prosperity.
It provides the basis for understanding socio-economic problems in
the macroeconomic analysis of an Islamic economy.
 DIFFERENT MARKETS IN ISLAMIC
MICROECONOMICS
Islamic microeconomics recognises that households act in three
dimensions, namely:
1 They go to the market to demand goods and services from
firms.
2 They offer their labour services and other resources in the
market as factors of production to earn income that is used to
pay for goods and services they need.
3 They play a role in the third sector where they either spend
part of their income or offer some services to seek divine
pleasure by fulfiling the needs of those who are poor from the
market.
 DIFFERENT MARKETS IN ISLAMIC
MICROECONOMICS
Similarly, firms also act in three dimensions, namely:
1 They demand factors of production from households to produce and
supply goods and services in the market.
2 They produce or supply these goods and services to meet the needs of
households.
3 They play a role in the third sector where they provide goods and
services free-of-charge to seek divine pleasure.

The place where goods and services are demanded by households and
supplied by firms is called the goods market. The place where factors of
production are supplied by households and demanded by firms is called
the factors market. The place where firms and households provide goods
or services voluntarily for seeking divine pleasure is called the third
sector.
 ECONOMIC DECISION-MAKING:
THE ASSUMPTION OF RATIONAL CHOICE
A primary assumption in conventional microeconomics analyses is
rationality.
The concept of rational man implies the following axioms:
• Axiom of completeness. It means that people are clear about their
preferences when ranking choices. This rules out the possibility
that consumers cannot decide on the choices they prefer.
• Axiom of transitivity. It means people are consistent in their
preferences.
• Axiom of continuity. It means people use common sense in
evaluating commodities that closely resemble each other.
 RATIONAL CHOICE IN ISLAMIC
ECONOMICS

• In real life, rationality in decision-making is bounded by values and

institutions of the society, regardless of any religion.
• The rationality assumption should include values and institutional
considerations besides the above three conditions of optimising
behaviour.
• The assumption of rational choice is an essential requirement when
studying the behaviour and decision-making process about allocation of
scarce resources.
• The Islamic concept of infāq, for example, requires a special definition
of rational choice.
• When we analyse the economic behaviour of an Islamic economic man,
we will define his mindset in terms of rushd, which means sound-
mindedness guided and regulated by a certain value system.
 ECONOMIC DECISION-MAKING:
THE MOTIVATION
• An important element in building the conceptual framework of
microeconomics is to consider the motivation underlying economic activities.
• In the Islamic perspective, human beings are advised not to take decisions
merely on the basis of instinctive desires or ahwāʾ (lust or desires).
• The objective of economic activities from Islamic perspective is ‘fulfilling
needs’. This is at variance with the conventional economic approach which
considers ‘satisfying wants’ as the motivation for economic activities.
• Though most of human needs may also be man’s instinctive desires, the
opposite may not necessarily be true. Some desire-based wants may not
represent human needs in the sense that they make no positive contribution to
human well-being, and spending on satisfying them will be a waste of time.
• Some desire-based wants may be prohibited by religion, society and customs
and one cannot delve in satisfying them.
 CLASSIFICATION OF NEEDS
IN ISLAM
• This is the critical category
which refers to those needs
that cannot be postponed or
left unfulfilled.
• It includes all activities and
goods that are essential to
the preservation of the
foundations of good
individual and collective
life.
• Avoiding them or
postponing them may
destroy or damage some
essential aspects of life.
• For example, satisfying
one’s hunger is a necessity.
Ḍarūriyyāt
(Necessities)
• This is the comfort category that
refers to needs that are meant to
improve and make life
comfortable.
• Thus, for example, all such food
that helps sustain life beyond the
critical level and assists in a
comfortable physical
development of the individual
falls in this category of needs.
• Conveniences exist in all aspects
of human life. This second
category of needs (notably,
conveniences) cannot be pursued
unless the critical needs that man
has decided to pursue under the
ḍarūriyyāt category are fulfilled.
Ḥājiyyāt
(Complementaries
or conveniences)
• This is the ameliorating category
which refers to needs that
beautify or ameliorate any aspect
of life.
• Humans like to conduct their
matters in a specific style and
taste that not only make one feels
good but may also be appreciated
in the community and make the
community feels good.
• Having a flower basket inside or
outside the house or having a
garden in the backyard would be
examples of this category of
needs.
• But this category of needs should
not be met until the first and
second category of needs have
been met.
Taḥsīniyāt
(Refinements,
embellishments or
luxuries)
 ECONOMIC DECISION-MAKING:
A BALANCING BEHAVIOUR

• A balancing behaviour is the counterpart of the concepts of

maximisation, optimisation or minimisation which are used in
conventional economic analysis for explaining the behaviour of
economic agents.
• Optimising behaviour may be relevant only in the second stage of
choice when decision is to be made with respect to demanding goods
and services to meet a particular need.
• There are specific Islamic teachings with respect to keeping a balance in
spending time and resources in different competing social, economic
and religious activities.
• According to the Qurʾān, the servants of al-Raḥmān (the Lord) are
those: ‘…who, when they spend, are neither extravagant nor niggardly,
but hold a medium (way) between those (extremes)’ (Qurʾān, 25:67).
Q&A