Microeconomics in Islamic Finance:

Microeconomic theory deals with the behavior of economic agents of the economic system, like consumer, firm and factors of production. Subsistence and the means of subsistence are bound up individually, and collectively with human life both influence one another. They raise some important questions in Islamic economic system that leads to Islamic microeconomics or microeconomics in Islamic finance:

  • What are the commands in respect of the individual?
  • What is one to earn?
  • What is one to spend? and;
  • On whom to spend?

So according to Islamic perspective, there two important questions:

  • What income may be looked upon as permissible? and;
  • What are the permissible ways to dispose it?
Islamic microeconomics

Microeconomics in Islam – How to Earn and Spend?

Islam encourages to strive for a living according to one’s capacity. According to the Islam Shariah, world is for effort, inertness is death. And Allah has placed many treasures in this earth, but to find them is conditional on us.

Basic Islamic Principles of Earning:

The individual has been bound to certain principles, which save the economy from becoming corrupt. According to Islamic Shariah, humans must keep two principles before them all the time:

  • First, whatever they earn must be permissible; and;
  • Second, the means used for the earning should also be pure and permissible.

Following these two laws will keep our spirits and hearts pure, and safe from evil. Moreover, our means should not create: Economic difficulties for others, oppression and cruelty.

Basic Islamic Principles for Spending in Islamic Microeconomics:

Spending is necessary for life’s development. So, it is important to know: What to spend? How much to spend? and On what to spend? Humans spend their money on themselves and on others. And complete guidelines are given in Quran and Ahadith.

Islamic Principles for Spending on Personal Needs:

  • In spending, neither extravagance, nor spending on useless things, nor miserliness is proper.
  • Person should be moderate in spending, because it contributes to a better collective economic order.

Islamic Principles for Spending on Other’s Needs:

  • According to Islamic Shariah, the more a person earns, more he or she is responsible for satisfying other’s needs.
  • The first rights on the individual’s income are those of the family.
  • Besides Zakath other charities and social rights are also incumbent on the individual.
  • In normal circumstances, the “secondary dues” should be paid in such a manner that a reasonable amount is saved for the family, so that they may not be left indigent and begging. However, in special conditions, selfless giving away is commendable.

Islamic Microeconomics is discussed in more details during the diploma in Islamic banking and Islamic finance certification programs, which are offered by AIMS (UK).

Understanding the Scope of Conventional Microeconomics:

On the other hand, scope of conventional microeconomics is purely materialistic, as it could be seen in the following theories:

Price Theory:

Each conventional economic system has to make the decisions regarding:

  • What is to be produced?
  • How it is to be produced? and;
  • How resources are to be allocated?

All such, under capitalism, is performed with the help of “Price Mechanism”, that is:

  • Those goods should he produced which maximize profits;
  • Those techniques should be adopted, which minimize costs of production; and;
  • The resources should be allocated in those uses, where the resources command higher prices; etc.

So, we can say that in microeconomics, we deal with the problems of production, consumption, distribution, and resource allocation.

Theory of Consumer Behavior and Demand:

Almost everyone face the problem of multiple wants and limited money. In such state of affairs, it is the desire of each consumer to maximize his satisfaction. And when it happens, the consumer is said to be in equilibrium. Microeconomics also deals with the problems of equilibrium.

Theory of Production Behavior:

In conventional microeconomics, four factors of production are responsible for productive activities. According to classical economists in short run, the production depends upon the units of labor only, while the capital is kept fixed. In such state of affairs, the total production increases at different rates. This phenomenon is known as “Law of Variable Proportions” in microeconomic theory.

Theory of Firm Behavior:

Like individuals, firm also want to attain equilibrium. And equilibrium of firm is attached with “Minimization of Costs” or “Maximization of Output”. Both these situations are called “Optimum Factor Combination of a Firm”.

Theory of Costs and Revenues:

In conventional microeconomics, we study different types of costs of production. The analysis of costs of production may be from short run point of view, as well as from long run point of view. Moreover, different types of revenues are also considered in microeconomics.

Theory of Market Structure and Behavior:

In conventional microeconomics, market is like Perfect Competition, Monopoly, Duopoly, Oligopoly and Monopolistic Competition are of greater significance for microeconomics. It is analyzed that firms under different market conditions, make decisions regarding the determination of price and output.

Theory of Income Distribution:

The national income of a country is the result of joint efforts of land, labor, capital and organization. And, national income has to be distributed amongst these factors of production. For Example: How the wages will be determined in the competitive and non-competitive markets? For this purpose, we have the classical and neo-classical theories in microeconomics.

Theory of General Equilibrium and Welfare Economics:

A general equilibrium is defined as a state in which all markets and all decision-making units are simultaneously in equilibrium. That is, a general equilibrium exists if each market is cleared at a positive price, with each consumer maximizing his satisfaction, and each firm maximizing profit.

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