CHAPTER 1

Nature and Scope of Economics

SECTION I: SECTION II:
NATURE AND SCOPE OF ECONOMICS ECONOMIC SYSTEMS
1. Subject matter of economics 1. Different Economics Systems e.g.
2. Microeconomics • Capitalism
3. Macroeconomics • Socialism
4. Scarcity, choice and opportunity cost • Mixed Economic System
5. Production possibility frontier 2. Islamic economic system

SECTION I:
NATURE AND SCOPE OF ECONOMICS
• Economics is known as mother of social sciences.
• It deals with the solving of economic problems of the society at individual (demand and supply)
and state level (health care, illiteracy, poverty, inflation and unemployment.)

Economists View point about Economics:

1. Adam Smith (known as the father of Economics)
➢ Explained it in his book “An Inquiry into nature and causes of Wealth of Nations” in 1776.
➢ According to Smith (1776), “Economics is a Science of Wealth”.
➢ According to him: economics deals with the wealth of nations rather than human welfare. He
elaborated how wealth is produced, exchanged, distributed and used (consumed).
Case Example
Production of wealth Two producers produce Wheat and furniture by combining factors of production
Exchange of wealth Producer of wheat needs furniture and other needs wheat. So they exchange the products
Distribution of wealth Payments of wages to Labour.
Consumption of wealth Household purchasing different goods

2. Alfred Marshal
➢ Wrote book entitled “principles of Economics” in 1890.
➢ Definition: Economics is the study of humans, in relation to the ordinary business of life. It studies
that portion of the personal and social activities, which are closely related to the attainment of
material resources, related to welfare and its utilization.
➢ According to Marshal:
• Economics is a social science as it studies the people in their ordinary business (day to day
affairs) of life.
• Wealth is the central area of interest.
• Economics mostly discuss about the welfare (wellbeing) of society.
3. Lionel Robbins
➢ book “Essay on nature and significance of economic science” in (1932),
➢ Definition: “Economics is the science which studies human behavior as a relationship between
(multiple) ends and scarce (limited) means (resources) which have alternative uses”.

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➢ Multiple Ends and scarcity of resources: It is said that the human wants are endless, the means or
resources to satisfy those needs are insufficient. So these Scarce resources can be used alternatively.
For example, a piece of land can be used for cultivation or to build a factory or house.

Nature of economics:
Economics: A science or an art:

❖ Both
❖ Science: laws are established based on the facts. An economist collects his facts, analyses them,
classifies them, and then discovers general principles.
❖ An Art: It cannot predict future events like any other natural science e.g. Physics, Chemistry. Human
behaviour is a fundamental element in the study of economics and man is endowed with a freedom
of will.

A positive science or a normative science:

❖ Both
❖ Positive economics:
➢ Deals with factual questions
➢ if we say that a firm makes decision on the basis of Profit. It is positive science
❖ Normative economics:
➢ Deals with value judgments. It involves ethical principles and norms of fairness.
If we consider whether a firm should make decision on the basis of Profit. It is normative science.

Definition/ Importance/ Limitations / Difference between Microeconomics and Macroeconomics

Microeconomics Macroeconomics
Origin The micro is Greek word which means millionth The macro is Greek word which means big or large
part
Definition Microeconomics is the branch of economics Macroeconomics is the branch of economics
concerned with behavior of markets, firms, and concerned with behaviour of the economy as a whole.
households.
Scope/ • It helps in determining Market equilibrium, (i.e. • Macroeconomics contributes to solving the
Importance determining commodity and factors price, output, problems of national income determination,
effect of market conditions on equilibrium). unemployment, inflation, balance of payment and
• It also concerned with Consumer Equilibrium, economic growth.
Firm Equilibrium. • It helps in Understanding of complex economic
• It deals with maximization of social welfare. systems.
• It assists Finance Minister in policies making. • It helps in achieving predetermine economic targets.
• It helps in the efficient employment of the limited, • It assists to achieve price stability
scarce resources.
Limitations • Micro economics ignores overall functioning of the • Macroeconomics ignores implications on
whole economy(narrow scope). individuals (Excessive Generalization).
• A decision might be useful in case of a single unit • A decision might be useful in the case of aggregates
but not in the case of aggregates. (e.g. Saving but not in case of a single unit.(e.g. a surplus fiscal
decision) budget)
• It is Inappropriate in major areas e.g. inflation.
• Weak assumptions: Micro economics assumes full
employment in economy which is an unrealistic.

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Interdependence between micro and macro economics:

• Both of these are the two key subfields of the major discipline of economics.
• Neither of these two can serve the purpose alone.
• What is true for individual actors might not be true for the aggregates and what is true for the aggregates
might not be true for the individual actors.

SCARCITY, CHOICE AND OPPORTUNITY COST:

Participants/ Agents in an Economy

Definition: Agent: An actor or decision maker within an economic model.
Four Types of Agents:
1. Households: (also called Consumer, Buyer)
The collective group of individuals not only consuming goods and services, but also providing labour for
firms
2. Firms: (also called Producer, Seller)
The collective group of organisations producing goods and services in an economy
3. Government: (also known as State)
The organisation that governs over society through a combination of customs and laws.
4. Foreign Traders: (also called Importer and Exporter)
The collective group who exchange goods and services between different economies.

Factors of production (also called Economic Resources)

• The factors of production are goods and services used in producing any goods and services.
• Resources used in production process are termed as input factors
These factors are classified as:
i. Human Factors: Labour, Entrepreneur
ii. Non-human Factors: Land, Capital:
1. Land:
This refers to all of Earth’s natural resources including:
• Non-renewable resources (natural gas, oil, coal, minerals, precious metals etc.)
• Renewable resources (wind power, Water power)
• Earth (used for farming, housing, factories, roads)
• Water, Clean Air etc.
Land is a passive factor of production as it depends upon some other active factor i.e. labour.

2. Labour:
Labour is human time spent in production processes.
OR
Every human effort either mental or physical being done during the production process with the
intension of earning any money reward is known as labour.
For example, machine operators in a factory, lecturers in colleges.
Labour is an active factor of production

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• Some people are more productive in the work place than others because they have different levels of
education, training and experience.
• This factor can also be enhanced in an economy through division of labour and specialization.
Division of Labour
“Dividing the production into a number of specialised tasks and assigning each task
to a particular set of labour.”
Example: creation of a pencil;
• cutting of trees,
• processing of wood into pencils,
• assembling pencil with graphite, rubber and the metal that holds it together
all are different stages of production of pencils.
Benefits of Division of Labour:
➢ Production of Goods of Superior Quality
➢ Workers' specific skills will be improved.
➢ Saving of Time
➢ Best Selection of the Workers
Specialization
“Specialization occurs when workers use specialized skills and knowledge for
completing specific tasks.”
Example: in a hospital, there are specialists doctors for every disease.
Benefits of specialization:
➢ Workers become quicker at producing goods (more efficient, more productive)
➢ An increase in productivity causes the cost of production to decrease (lower average costs)
➢ More motivation from job satisfaction
➢ Specialization promotes invention

3. Capital:
“Capital means man-made physical goods that used to produce other goods and services.”
Examples: machinery, equipment, building, hospitals, schools, roads, railways etc.
• A great deal of the capital in an economy is contributed by government.
For example, transport networks (roads, railways and airports), hospitals, schools and universities.

Capital formation
Capital formation is the use of current resources to create capital goods which are used for production of
other goods such as tools and instruments, plant and equipment etc.
The process of capital formation involves the following three stages;
1. 1. Creation of savings
Savings are done by the Individuals or households. They save money by not spending all their income.
2. 2. Mobilization of savings
• This is the second step in the process of capital formation.
• It involves transfer of savings from the households to businesses for investment.
• To increase in rate of capital formation, development of capital market is necessary in which
individual investors, banks and financial organizations, insurance companies and government etc
provide funds to the corporations/ businesses.
3. 3. Investment of savings
For capital formation, savings must be invested by entrepreneurs.
(Saving/ investment will further be discussed in chapter 7)

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4. Enterprise (Entrepreneurs):
“The people who arganise other three factors of production, supervise them and take risk of business are known
as entrepreneurs.”
Entrepreneurs set up businesses. if the business is successful they can achieve profit.
Entrepreneurs create businesses, provide return to the other factors of production.

Example of Factor of Production:

Land Labour Capital Enterprise
Owner of business who
Making a Textbook Wood to make Author Machines to energised the factors of
paper compile book production to make a textbook
.

Rewards of factors of production

Rent: (reward of Land)
Rent is the payment for the use of factors of production that are fixed in supply (i.e. Land)
Wages: (reward of Labour)
Wages are a sum of money paid under contract by an employer to a worker for services rendered.
Interest: (Reward of Capital)
Interest is the price paid for the use of capital.
Profit: (Enterprise)
Profit is a reward for the entrepreneur for taking risk.

Other Basic Concepts Used in Economics:

Consumption
• Consumption represents the value of goods and services that are bought by the people.
• It could also be defined as the value of domestic and foreign entities’ sales to the
households in the domestic market.
• This excludes business investments and public (Govt.) expenditure.

Components of consumption:
Consumption can be divided into three major categories according to the durability of the
products purchased;
i. Durable goods e.g. automobiles, furniture and other household equipment;
ii. Non-durable goods/ Perishable e.g. food, clothing;
iii. Services e.g. transport, medical care, entertainment etc.

TYPES OF GOODS (OUTPUTS)

Our wants are satisfied by the consumption of goods. Goods can be classified:
1. From consumers’ point of view.
2. From producers’ point of view
3. From government’s point of view.

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1. Goods from Consumers’ Point of View

• Inferior goods:
Inferior Goods are those whose demand decreases as income increases. Examples include Public Transport.
• Normal goods:
Normal Goods are those whose demand increases as income of consumer increases. Examples include Milk.
• Superior goods:
Superior Goods are those whose demand increases by larger portion as income of consumer
increases. Examples include Luxury Car.
1.2. Independent and Related Goods:
• Independent Goods:
Independent Goods are those goods for which price of one good does not affect demand of other good
(i.e. they have cross price elasticity of zero) e.g. Shoes and fan, Chair and watch.
• Related Goods:
Related goods are those goods for which price of one good affects demand of other good. There are two
types of Related Goods i.e.
a. Substitute goods/Competitive Goods:
These are goods which serve the same purpose, and are used in place of each other. Increase in
the price of one good leads to increase in demand for the other good. e.g. Coke and Pepsi, Pens
and Pencils, Tea and Coffee, Petrol and CNG, Mutton and Chicken.
b. Complimentary/Compliment Goods:
These are goods which serve different purposes, and are used together. Increase in the price of
one good leads to decrease in demand for the other good. e.g. Tooth Brush and Tooth Paste, Car
and Petrol, Pencils and eraser, Mobile and charger, DVD Player and DVD, Cigarette and Lighter.
2. Goods from Producers’ Point of View
Substitute in production and compliments in production:
Compliments in Production ( ‘goods in joint supply’, ‘joint products’ or ‘by-products’):
One of two goods that are produced together, using the same resources. Producing more of one
will lead to producing more of other e.g. production of beef and leather (from cow).
Substitutes in production:
One of two goods that can be produced as alternative, using the same factors of production.
Producing more of one will require producing less of other e.g. production of color printer and
black printer (by same firm).
3. Goods from Government’s Point of View
3.1 Merit Goods, and Demerit Goods:
Merit Goods are socially desirable goods because they are beneficial for the society. They create
positive externalities. Examples include Education institute, Hospital, Parks etc.
Demerit Goods are socially undesirable goods because they are harmful for the society. They create
negative externalities. Examples include Cigarette, Alcohol etc.
3.2 Public Goods, Private Goods and Club Goods:
Public goods are those goods which can be enjoyed by anyone and from which no one can be excluded.
Two key attributes of a public good are:
➢ Non-rivalry (i.e. cost of extending the service to an addition person is zero), and
➢ Non-excludability (i.e. it is impossible to exclude individuals from enjoying it).
Examples include National Defense System, High-ways, Public parks.

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Private goods are those goods which have characteristics of excludability (i.e. it is possible to prevent
consumers who have not paid for it from having access to it) and rivalry (A good whose consumption
by one consumer prevents simultaneous consumption by other consumers).
Club Goods are excludable but non-rivalrous. Examples include private golf courses, services by club to
their members.
3.3. Free Goods and Economic Goods:
Free goods are commodities that are available without limit.
Economic goods are commodities that we value that are limited in supply.

Scarcity and Opportunity Cost

Human beings have scarcity of economic resources while they have unlimited wants to satisfy.
Therefore, they have to make choices among these available scarce resources.

Opportunity Cost:
Definition:
“The opportunity cost is the value of the most valuable alternative (goods or service) foregone.”
Examples:
• The opportunity cost of a government building school is hospital for the citizens.
• The opportunity cost of student going to college, is the forgone wages that could have been
earned.

Applications of concept of Opportunity Cost:

Opportunity costs can be applied to all of the agents that we have discussed so far in a number of
different ways.
Households:
The household has to make decision that which good and service to consume. If an individual consumes
Good A, then satisfaction forgone of Good B will be opportunity cost.
Firms:
Firm has to make decision that which good to produce. If it produces Good A, the opportunity cost will
be the revenue forgone of Good B.
Governments:
Government also has to decide that which social service has to provide to its citizens. If it decides to
provide Service A (e.g. education) then Service forgone of B (e.g. health) will be the opportunity cost.
Foreign Traders/ International/ Nations (Importer/Exporter):
Nation has to decide which good to import or Export. If Good A is exported, revenue loss of selling it in
local market will be opportunity cost.

PRODUCTION POSSIBILITY FRONTIER/CURVE:

The Production Possibility Frontier (PPF; also known as the Production Possibility Curve, PPC)
represents the maximum combinations of two alternative goods an economy can produce using all of its
resources efficiently.
OR
Production Possibility Frontier demonstrates those baskets of goods which can be produced when all
scarce resources of an economy are employed efficiently.

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Key concepts;
• Trade-off: To get something we must forgo something else as resources are limited.
• Choices: Due to limited income one should make choices on the basis of needs and priority.
• Efficient and inefficient use: Efficiency states that the maximum attainable combinations a society is
achieving, while the in-efficiency termed as the underutilization of resources due to different
macroeconomic affairs such as; any pandemic like COVID-19.
• Growth: Increasing ability to produce more goods and services in an economy over time, through
inventions, innovations, discoveries etc.
• Increasing opportunity cost: Law of diminishing returns increases the opportunity cost by continuous
switching of resources to some other uses.
➢ Formula:
The opportunity cost of X commodity in terms of units of Y given up can be written as:

Opportunity Cost: 𝒀𝟐−𝒀𝟏

X𝟐−𝑿1
Assumptions:
• Efficient use of resources: It is assumed that economic resources are used efficiently
• Full employment: It is assumed that all available economic resources are fully employed.
• Input resources are fixed: It is further assumed that economic resources are given and fixed. The
change in quantity and quality of input resources is not possible.
• Two goods model: It is assumed that society’s resources are deployed to produce only TWO goods like,
guns (for defense requirements) and bread (representing social needs)
• Constant state of technology: It is further assumed that techniques of production remain unchanged
during production process.

➢ Illustration:
An economy which is producing TWO goods like Guns and Bread:
Possible Combinations GUNS BREAD
A 0 100
B 1 90
C 2 70
D 3 40
E 4 0

• From the table it can be concluded that given the Limited input resources and state of
technology, the production of guns and bread is limited.
• Moving from combinations A to E, we are transferring labour, machines, and land from the
bread industry to gun industry in order to increase quantity of guns to be produced.
• Moreover, table is representing that when switching of scarce resources from bread
industry to gun industry, the forgone is increasing gradually.

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Properties of Production Possibility Frontier (PPF):

There are TWO distinguished properties of an ordinary PPF:
• Down sloping left to right: This implies the trade-off between two goods due to constraint of
input resources.
• Concave to origin: It implies an increase in slope of PPF, as the opportunity cost of producing
more of one product increases due to two reasons:
i. Law of diminishing returns and,
ii. Some resources are not compatible for some goods, by switching resources from
compatible goods to non-compatibles, more of one product has to forgo to get a little
of other good.
➢ For Example:
Land A is more fertile for rice crops and land B is for cotton. By switching land A from
rice crop to cotton, we will get little of cotton by sacrificing much of rice crop.

Economic Growth and Shift in Production Possibility Curve:

During the phase of economic growth of a country, it experiences expansion in its productive
potentials.
For example, in a growing nation government has more resources to spend on building human
resources. By investing in man, nation would have more doctors, engineers, charted accountants
and skilled entrepreneurial etc.
Such investments enable the agents of an economy to produce more goods and services than before.
As a result, economy will be able to produce even those combinations which was a dream before.

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Section II

Economic System
Definitions:
“An economic system, or economic order, is a system of production, resource allocation and
distribution of goods and services within a society (eonomy) or a given geographic area”.
“An economic system is a means by which societies or governments organize and distribute
available resources, services, and goods across a geographic region (economy) or country”.
Leonard S. Silk,
“it refers to the way different economic elements (individual workers and managers,
productive organizations such as factories or firms and government services) are linked
together to form an organic whole”.
All economic systems must confront and solve the four fundamental economic problems:
• What to produce.
• How to produce.
• For whom to produce

Market Mechanism /Price Mechanism

The system where price and quantity of goods are determined by interaction of free forces of demand
and supply.
How the Economic Problem resolved through Price Mechanism (or through Market Economy/
Market Mechanism) (also resource Allocation in Market economy)
What to produce:
What to produce is determined by consumer demand. Firms produce the commodities that give the
highest prices.

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How to produce:
Producers use those factors of production and production techniques which provide least cost e.g. if
labor is cheaper than machine, more of labor and less of machine will be used in production technique
(and vice-versa).
For whom to produce:
For whom to produce is determined by purchasing power. Production is made only for those who have
the ability and willingness to pay.

Following are the main Economic Systems:

i. Capitalism (Laissez faire/ Market economy/Free Economy)
ii. Socialism (Planned/ Command economy)
iii. Mixed Economic System

1. Capitalism/Laissez faire/Market economy/Free Economy/

Free Market Economy
Definition:
According to Prof. Loucks “Capitalism is a system of economic organization featured by the
private ownership and the use for private profit of man-made and nature-made capital”
• This is an economic system in which decisions about resource allocation are made by individuals
and private firms through market-mechanism without intervention of government.
• This style of thinking came in the 18th Century as an argument for government to not intervene
with market forces.
Features:
1. Reliance on the market and price mechanism to allocate resources.
2. Private ownership and control of factors of production.
3. Self-interest and profit motive motivate economic decisions.
4. Prices for factors of production and Goods are set by market.
Examples: Canada, Chile, Germany, Japan, South Korea
Benefits Draw backs
Auto-adjusted price mechanism Threat of economic instability due to unplanned production
decisions
Motivation for economic agents to put their resources Rising income inequalities
in commercial activities rather than keeping them idol.
Capital accumulation/ Formation Firms put all efforts to maximize their profit rather than
human welfare
It Retains consumer sovereignty Risk of unemployment and inflation
Efficient use of resources Danger of production of luxuries rather than necessities.
No costly planning/bureaucracy Ignores social costs e.g. air or water pollution, drugs etc.
Responsive to changes in the technological Failure to plan long-term
environment
Freedom of choice (of profession) Danger of the growth of monopolies
Freedom of enterprise Exploitation of weak economic agents
No Provision of public goods
Waste of resources. E.g. on advertisement

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2. Socialism /Planned/ Command economy

It is an economic system in which Government makes all important decisions about resource-allocation.
This style of economic system was prevalent throughout the Soviet Union.
Features:
1. State decides what are the “Common Goods” which are to be produced.
2. Resources are state owned and the state decides how to allocate them in production.
3. State produces common goods through an administrative system.
4. Prices for factors of production and Goods are set by state.
Examples: North Korea, Cuba, Finland

Benefits Draw backs

Production is carried out for the needs of society and Lack of profit motive and competition makes the
not for the benefit of the few. economy inefficient.
The social costs of production and consumption are Bureaucratic and slow to respond to changing needs or
fully considered in economic decisions. technology.
Full employment of the workforce is possible. Central planning reflects the preference of central
planners and not of society.
Less duplication and waste of resources. Likelihood of corruption.
Permits long term industrial and social planning There is a limited variety of products..
fostering economic stability.
Considered a more equal, classless system with Consumers have no sovereignty (i.e. power to
equality of opportunity. determine what goods and services should be
produced).
Social security: job security, medical care etc. Less Economic freedom.
Prevention from price discrimination
Discouragement of monopolistic practice

3. Mixed Economy
Definition:
It is an economic system in which decisions about resource-allocation are made partly Government and
partly by market-forces of demand and supply.

According to Prof. Samuelson, “Mixed economy is that economy in which both public and private sectors
cooperate.”
• Mixed economic system is newly emerging concept, which is widely popular due to drawbacks
of both systems.
• Most of the developing and developed countries have adopted mixed economy to accelerate the
pace of economic development.
• Examples: Sweden, France, United Kingdom, United States, China, Netherland.

Benefits Draw backs

Co-existence of Private and Public Sector State may regulate economy for political ends.
Public interest guarded by legislation and state Responsibility for economic performance blurred.
provision.

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Freedom of choice regarding economic decision Government intervention creates costs, uncertainty
and inefficiencies due to bureaucratic controls.
Prices are determined simultaneously through market Lack of cooperation between public and private
mechanism and price control policy of the government sector.
Government is also involved in economic matters of the State regulations and requirements may cause a
country to protect weak agents of the economy e.g. burden by increasing cost of doing business.
through minimum wages.
Ensures the reduction in economic inequalities

Types of Mixed Economy:

The mixed economy may be classified in two categories:
Capitalistic Mixed Economy:
• Also called as capitalistically dominating mixed economic system.
• This is most popular type of mixed economy.
• Private sector remains responsible for utilization of factors of production.
• Government remain responsible for sustainable economic growth.
Socialistic Mixed Economy:
• Also called as government dominated mixed economic system.
• Government largely shares means of production.
• Primary economic decisions are taken through controlled market forces.
• Industries are owned by the state.
• Operation and management of industry is done through centrally planned bodies.

The Role of Government in a Mixed Economy

(i) Distribution of income
In order to correct the unequal distribution of income and wealth, government reallocates income in an
economy by raising taxes on high earners or luxury items and spending them on providing facilities for
general public.
(ii) Price control
To restrict the monopolies charging higher prices, government sometimes acts to control prices for
certain essential goods and services, either by becoming the supplier for such commodities or imposing
strict regulations on suppliers.
(iii) Production of merit goods
Government might act to ensure supply of merit goods and services by introducing subsidies when
suppliers fails to supply desired quantity.
(iv) Controls through law
The government regulates and controls commercial activity to prevent possible excesses or shortages
that might occur.

Islamic Economic System

Features of Islamic Economic System:
1. Allah is the sustainer:
It means Allah has created all the resources and is responsible for feeding and nourishing all creature
including human being.
2. God is the true owner of everything:
Human beings are only trustee of resources. Their authority to use resources is limited by certain
principles.

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3. State ownership of resources:

Islam neither proposes not prohibits establishing state owned enterprise. Therefore, a free market can
exist where entrepreneur can earn profit.
4. Practicing moderation:
Islam teaching middle-way and fair distribution of resources. People are taught to share wealth.
5. Prohibition of charging interest (Riba):
It is forbidden for the lending party to earn interest on investment. Both parties must share risk and
rewards.
6. Earnings from Halaal activities only:
Earnings should be made only from goods or services which are allowed in Islam.
7. Hoarding of wealth is discouraged:
Islam does not discourage acquisition of wealth. However, Islam discourages hoarding of wealth and
encourages utilization of resources for welfare of society.
8. Zakat:
Zakat is a financial tax on wealth of people to help poor. It ensures equal distribution of wealth.

Islamic financing
Profit and Loss Based Financing:

i. Mudaraba – This is a kind of partnership where one partner provide capital and other comes
with expertise and management skills. Profit is shared as per pre-agreed ratio. In case of loss,
first will lose his capital and other will lose the times and efforts.
ii. Musharaka – This is a kind of partnership where two or more parties invest capital in a business
and share the profit and loss proportionally. All partners are entitled to be a part of management.
Assets Based Financing:
i. Murabaha: A “contract of sale” between the bank and its client for the sale of goods at a price
plus an agreed profit margin for the bank. The contract involves the purchase of goods by the
bank which then sells them to the client at an agreed profit. Repayment is usually in installments.
ii. Ijara – Ijarah is an Arabic word and it means “to give something on rent”. In Ijarah a customer
can use an asset or equipment, which is owned by an Islamic bank, for a fixed period against a
periodical rental payments.. Ijara is very similar to a leasing contract, and the asset under the
Ijarah contract could be a car, home, plant, or a machinery.
iii. Ijara-wa-Iqtina – Similar to Ijara but the customer is able to buy the asset at the end of the
contract.

Comparison of Islamic Economic System and Capitalist Economic System:

Features Capitalist Economics System Islamic Economics System
Right to Individuals have unlimited right to own Islamic state can nationalize private owned
Ownership private property which lead to wealth- resources to prevent wealth concentration.
concentration in few hands.
Monopoly Private ownership of businesses results Public-interest businesses are maintained by
in Monopolies, Inflation and government or maintained under joint-
Unemployment. ownership of government and private sector to
balance the supply and demand.
Interest The interest is a source of capital Charging Interest is abolished in Islam. Islam
formation in a capitalist society. encourages Saving and Investment through
Partnership and profit-sharing.

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Economic Capitalism’s motive is only profit. In Islamic system only "HALAL" goods/services
Freedom Entrepreneurs are free to do any are allowed to be produced and consumed.
business to earn profit. "HARAM" goods and services (like alcohol drinks,
drugs) are not allowed to be produced and
consumed.
Distribution Capitalism leads to unequal distribution Islam discourages to hoard wealth and
of Wealth of wealth because of concentration of encourages to share wealth for welfare of society.
wealth in few hands. Due to "ZAKAT" and "SADQAT" wealth
automatically transfer from rich to poor.
Relative Capitalism is based on belief that Islam is based on belief that there are more than
Scarcity resources are scarce. Therefore, a enough resources to satisfy needs of all. Everyone
minority group with wealth hoards should be both producing and consuming to
most of the wealth and other population ensure access to these resources.
cannot fulfil even its basic needs.
Role of In capitalism, there is no or minimum In Islamic System, state ensures that public
Government role of government. interest and welfare is protected in markets.

Sharia law
Sharia law is the branch of statute that formalises the principles of Islamic economics into law. For
example, under Sharia Islamic law:
• Making money from money – e.g. charging interest – is not permitted
• Wealth should only be generated through legitimate investment in assets and legitimate trade
• Investment in companies involved in haram activities (e.g. with gambling, tobacco and alcohol etc)
is prohibited.
• Short selling and non-asset backed derivatives are not permitted
There are now a range of products freely available on the global financial markets that comply with
Sharia Islamic law. These include bank current accounts, mortgages and even personal loans.

SAJJAD AHMAD MALIK 15