Contents


Who are the agents?
Individual or households
Entrepreneurs (financial firm and non-
financial firm)
Government

Their roles
 Who are the agents?

 In economics, an agent is an actor and decision maker in a
model.

 Typically, every agent makes decisions by solving a well or

ill defined optimization/choice problem.

 The term agent can also be seen as equivalent to player in

game theory.
 Economics Agent

 Household
 Firm
 Government
 1. Households
 Own all the factors of production: land, labor, capital
and entrepreneur. 
 Provide the service of factors of production to firms and
the government.

 Receive payments in the form of rent, wages, interest

and profit.
 Individual or households


 This approach is justified since the subject matter of
economics and also Islamic economics is the behavior of
man in making decisions related to his economic life.

 The concept khalifah can better explain the concept of Islamic

man who is the economic agent in Islamic economics.

 The khalifah, unlike the rational economic man of modern

economics, is not only interested in maximizing his own
utility and his self-interest but also in building an intimate
relationship with God, his fellow human beings and the
universe.
 Continue…….. Individual or households


 The structure of “self-interested behavior” as having three
distinct and essentially independent features:

 Self-centerd welfare: A person’s welfare depends only on his

or her own consumption (and in particular it does not
involve any sympathy or antipathy towards others).
 Self-welfare goals: A person’s goal is to maximize his or her
own welfare.
 Self-goal choice: Each act of choice of a person is guided
immediately by the pursuit of one’s own goal (and in
particular, it is not restrained
 2. Firms

 Is an organization that buys the factors of production
from household, and then produces and sells goods
and services.

 Firms will sell their goods and services to households

and the government and earn a revenue from sales.

 A firms will pay wages, rent, and interest to

households for the services of the factors of production
and also pays taxes to the government.
 Entrepreneurs


 An innovative entrepreneur describes the growth path of a
developed economy.

 It can be easily elaborated that in a developing economy

the growth may not require an innovative entrepreneur,
but simply an entrepreneur who is willing to bear the risks
involved in initiating economic activities.
Continue….

 Growth requires

new initiative
and new initiative
involves risks. Some one has to bear the risk if the
initiatives have to be taken.

 The more risk bearers are generated in the economy, the

higher will be growth.

 The experience of developing countries in the

contemporary world has provided enough evidence that
scarcity of capital is not the only factor behind under-
development.
Objectives of a firm in Islamic perspective

a) Lower order (Tabi’i)


Profit maximization
This objective is only common sense.
The profit motive is a tabi’i law- in islamic law of transaction, all
contract of partnership seek to create profits from the venture.

b) Higher order (Syariah):

The producer assumes the role vicegerent or administrator of
God’s bounties and resources.
Allah has made this world and its resources subservient to man.
As a God’s vicegerent (Khalifah), the producer must choose the
best technique of production available- to pursue efficiency-
otherwise he is guilty of tabzir.
 3. Government

and firms.

The government will collect taxes from households

 Government revenue will spent on development and

for operational purposes.

 Government also buys factor production from

households for public consumption.
 Government

 Islamic government is a system of government which follows the
laws and principles of the Quran and the Sunnah of Muhammad.

 Government is the responsibility of all humanity, especially of

those people who understand that they are the 'caliphs' of God, not
the privilege of a ruling class of theocrats.

 Islamic government enforces the law of equality and it establishes

the rule of justice. It is always based upon consultation.

 Muslims believe that only when this system is established can

there be justice and harmony in society.
 Government

 In Islam, expected behavior of a firm would not be any different
from the expected behavior of any other member of the society.

 Since firm itself does not have a conscious, behavior of its

managers becomes the behavior of the firm and their actions
are subject to the same high standards of moral and ethical
commitment expected from a Muslim.

 In other words, firm’s economic and moral behavior is shaped

by its managers acting on behalf of the owners and it becomes
their fiduciary duty to manage the firm as a trust for all the
stakeholders and not for the owners alone.
 Circular Flow of Income and Expenditure


 3 cases of circular flow:

1. A case of two sector economy (the simple economy)

2. A case of three sector economy (closed economy)
3. A case of four sector economy (opened economy)
Case 1: 2 sector economy (the simple economy)


Factor Market

Y = rent, wages, profit, interest

HOUSEHOLD FIRMS

1 Consumption (C)
Investment
Saving Product Market
(S) (I)
Financial Market 2
 Case 2: 3 sector economy


Factor Market

Y = rent, wages, profit, interest

Transfer Government
payment (G) expenditure (G)

Household GOVERNMENT FIRM

Taxes (T) Taxes (T)

Consumption
(C) Product Investment
Saving
Market (I)
(S)
Financial Institution
Case 3: 4 sector economy
Foreign
Import
(M) Sector Export
(X)
Y = rent, wages, profit, interest

(G) (G)
Household GOVERNMENT Firms
(T) (T)

(C)

(S) (I)
Financial Institution
THANKS!
