Umair Javed

70080046

What is a firm? Make a comparison

between an Islamic and Capitalistic firm.

Basic structure of Firm

Firm exists for production of goods and services, so to earn fraction of profit on selling of output
It is worthwhile to consider how much firm is entitled to earn profit. Despite performing one
function of output generation, variants firms have different philosophies lying behind production
of goods and services. Although capitalistic firm has sole function of profit maximizing, it
considers other manipulative ways to earn its brand name and paraphernalia. Islamic firm
considers list of worldly motives of firm functioning as well as moralistic strands. Firm is such
enterprise which collect inputs (factors of production) and convert them into useful good and
services. Firm might want to reduce the per unit cost of making goods and services. Firms might
want to generate maximum profit without considering any factor. Firm’s objective attitude
depends what underlying principles and objective it is following.

Principles behind working of Firm

In case of capitalistic firm, it follows might be following business laws and government
regulation to avert any lawsuit, but there is lack of moral and ethical consideration of producing
goods and services. There might be some ethnics provisions in secular firm’s ethnical code
whereby giving healthcare and protection within premises. In Islamic firm, there are set of
general guidance to be followed by firm’s owners and managers because they are not just
accountable to customers, they are also accountable to Allah Almighty. Islamic firm should not
produce any resources by theft or dacoity or unlawful means. Undue use of orphans’ property is
condemned. In case of capitalistic firm, there is intense competition among firms, they might
destroy some of useful means by other’s conspiracies. That is way cut-throat competition is
discouraged in Islamic firm practices. All negative strategies and tricks should be strictly
avoided, and firms should cooperate with each other in a constructive manner. In capitalistic
firm, advertisement is considered essential component of production and selling but Islamic firm
is prohibited from using misleading and false advertising. Similarly hoarding of goods and
creating artificial scarcity is also prohibited. There is institution of AL-Hisba(ombudsmen)
working in market to locate any inefficiency and malpractices. Customers can complain and
identify the ill practice and Al-Hisba will act upon and correct distortion. Al-hibsa will control
prices in manner that monopolistic and hoarding trends should be avoided, however it allows the
increase in prices if there is shortages due to natural calamity or other uncertainty.
Objective of Firm
Firm’s basic purpose is to earn profit and maximize it. It also considers the minimization of
costs, and maximum increase of its image. Because Profit is subtraction of total cost from total
revenue, so maximize the total revenue through maximization of revenue and minimization of
costs.
In the Islamic perspective, profit maximization is not only purpose of firm while disregarding the
principles of benevolence and justice. Islamic firm will consider following objectives at its
disposal:
 It will fulfil demand of justice, so to gain maximum profit.
 A need to contributing in society for increasing the total welfare and good of everyone.
 Enhancing efficiency and minimizing the wastefulness.
 Obliging the social needs and recognizing social responsibilities
In contrast to this, capitalistic firm concedes that profit maximization is not sole purpose of
firm’s existence. It follows following objectives
 Firm wants to remain in market for indefinite period. It may flaunt with idea of profit
maximization
 It avoids earning maximum profit for reason that new competitive firm might enter in
market.
 It deliberatively lowers profit to portray its good image.
 It forgoes the big junk of profit just for sake of its security, stability and continuity.

Firm under different market conditions

Perfect Competition

Perfect competition is closer to principles of justice. Islamic firm is motivated by moral values
set by moral code of Islam. All information should be made available from vendor and sellers, so
to determine the price efficiently In perfect market, Islamic firm earn normal profit in all
circumstances contrary capitalistic firm which strives to earn supernormal profit. Islamic firm is
always to make sacrifice of some profit margins because Muslims are motivated on
consideration of reward hereafter. Instead of engaging in cut-throat competition, Islamic firm
work on principle of cooperation with one and other.
 Y
Price

SMC SAC

X
0 a Output b

Fair competition in Islamic Economy

Above figure shows expenditure of firm in short run, which turns into horizontal line after some
point. For consideration of profit maximization, capitalistic firm will produce at point oa, thereby
avoiding ob. On other hand, Islamic firm can produce at point ob if there is a smaller number of
firms in market. But once new firms start entering in market, firm will cut back its production
level at point oa because Islamic firm believes earning normal profit only.

Monopoly

In monopoly structure, single firm earn supernormal profit in capitalistic firm because it has
manipulative power to alter the price and quantity. So it produce minimum costs but it produce
lower than capacity so it can earn maximum profit by selling at maximum prices. On other hand,
Islamic monopolistic firm act differently, it recognizes its social responsibility and tries to
improve market condition, by not exploiting the consumers.
 Y
SMC
Price

SAC

Ps
I
Pi
D

P0 AR
E

MR

X
0 Qs Qi Quantity

Monopoly Under Islamic Spirit

In above figure, Capitalistic firm set its equilibrium at MC equal to MR. Firm will produce
quantity of output at 0Qs will set price at ps. on the flip side, Islamic firm while trying to improve
market outcome, it will achieve its equilibrium at point I where MC equal to AR. So, Islamic
monopolistic firm will set quantity at QI which will increase the output generation. Thus, Islamic
monopolistic firm will earn normal rate of profit.

Oligopoly

In this structure, there are few firms which are producing almost homogenous products.
Capitalistic firm create opportunity of collusion where each firm produce profit maximizing
output and it choose its price leader, other follow it, in this way consumers have to pay hefty
price due to monopolistic attitude in this structure. It also creates opportunity of price war where
one firm could possibly hurt other.
In contrast, Islamic renounced the practices of exploitation in product ion and promotes the
concept of just price. It doesn’t allow false advertisement. Oligopoly firms should sit together to
talk about producing output increasing, not profit increasing quantity because Islamic firm has to
follow the principle of benevolence, justice and fairness.

Conclusion
Both Islamic firm and capitalistic firms motivated by profit maximization. Both firms don’t
consider profit maximization as its sole motive for producing goods and service, however
capitalistic firm might consider that profit maximization is sole motive for long term. Both firms
might forgo profit maximization because Islamic firm follow moralistic consideration in
production processes while capitalistic considers worldly motives of building goodwill and brand
image.