CHAPTER 1 (2) - Economic System

CHAPTER 1
Economic System
Dr. Nurul Nadia Abd Aziz
Copyright © 2023 Dr. Nurul Nadia Abd Aziz 1

Four Basic Economic
Problems
• Regardless of how decisions are made,
each economy system must answer FOUR (4)
fundamental questions.
• The questions will be solved according to the system
implemented by each economy.
• Different economic system will find different ways to
answer each questions.

Four Basic Economic
Problems
What good How to How much For whom

and services produced? will be will goods
will be produced? and serviced
produced? be
produced?
• Due to limited resources, all economies
What good must make a choice.
• The economy or the society should
and services choose the types of goods and services
will be needed by the country which satisfy the
produced? needs of the consumers due to limited
resources.
• The economy needs to decide the

How much amount that needs to be
will be produced due to limited
produced? resources.

• The economy should determine
the methods and the best
How to techniques of production in order
produced? to maximize production and
minimized cost.
For whom • The economy should decide who

will goods gets the goods and how to
distribute them to the people.
and serviced •
This question is also known as a
be distribution question.
produced?

Economy System
3
1 4
2
Mixed Islamic
Capitalism
Socialism

Capitalism
(Free Market/Laissez Faire)

Definition
• A system where all economic decisions are made by
individuals in the society without government
intervention.
• Examples: USA, Japan, Canada, UK.

Private ownership of
Price system resources.
• In the capitalist market the • Resources belong to the private
price is determined by the individual and private firms.
forces of market demand and • People have right to own property.
supply.
No government Freedom of
intervention enterprise.
• Government has no role in • Firms and individuals are
economic decision. free to choose their own
• The only role is to regulate and to enterprise.
enforce the law in order to stabilize • They produce what
the economic condition of the consumers desire.
country.
Advantages of Capitalism
Optimum utilization of
resources
Wide variety of goods • Producers are trying to
• Consumers get so produced as many quality
many choices of product to satisfy the
products. consumers. No resources
can be wasted.
Automotive working
• Products being Competition leads
produced base on to innovation
demand and supply in • To compete producers
the free market. need to come out with
new product invention.
Disadvantages of Capitalism
Human welfare ignored.
•Products produced based
Wasteful competition. on what individual wants
•Excess variety of goods not what society wants.
in the market that leads
to wastage.
Misallocation of resources.
Unequal distribution of •Resources used to produce
income
more luxury goods for rich
•There is a wider gap between people that have more
the rich people and poor purchasing power.
people.
Capitalism
What to How to For whom
produce? produce? to
• 100% will be • There are a few produce?
methods can be
based on used to produce • Producers
what people the products will produce
desires. either by labor or
the goods
by machine or by
• Production both labor and and services
depends on machine. to those who
the goods • Producers will
choose the can afford to
demanded cheapest and yet purchase
by the efficient methods them.
consumers. will be adopted in
the production.

Socialism
(Communism/Command Economy)

Characteristics
• Public ownership of
resources.
– Resources are belonged to
the government.
– People have no right to
own capital and property.
• Central authority.
– All economic decisions are
made by the government.
Characteristics (continues)
• Non price mechanism.
– Price of products are fixed
by the government and not
determined by demand and
supply.
• Central control and ownership.

– Government intervenes in
all aspects of economic
activity.
– It controls the production,
consumption and the
distribution of the products.
Advantages of Socialism
Better allocation
No serious recession of resources
• Government will
and inflation
allocate all the
Since the price and the job
resources efficiently for
is in the government’s
current and future
hand, such problems can
usage.
be easily avoided.
Equal distribution of
Social welfare income
• Government produces • There will be no
goods that are needed difference between the
by the societies instead rich and poor. Everybody
of what individuals has an equal chance to
want. earn income.
Disadvantages of Socialism
Lack of incentive and
No freedom of choice initiative by the
• People have to accept individuals
whatever been produced
by the government • People are not motivated
enterprises. to work harder because
they have no profit motive.
Waste of economic
resources Low standard of living
• Government produces of people
goods that are not really • Socialist system does
required by public.
not contribute to high
standard of living of the
society.
What to produce? How to produce? For whom to
• Central • Central produce?
authority will authority also • Central
decide what to decides which authority
produce based techniques will produces goods
on the needs of be used and services to
the entire whether the fulfill the needs
society. traditional or of the society
modern not individual.
techniques.

Mixed Economic System

Characteristics
Public and private • Resources are owned partly by public and partly by
private.
ownership of • Private conducts business freely and government will
resources. provide incentives and facilities.
• Price of products and services is determined by price

Price system and mechanism but some price will be controlled by the
economic plans. government (commodity goods).
Government helps to
narrow the gap • Government closes the gap through the imposition of
between two incomes tax and welfare payments.
groups.
• Government intervenes in order to avoid unsafe and
Government dangerous products being produced by the industry.
interventions. • This can be done by setting legislation and direct
provision.
• Decision is made by both public and private
sectors.
• Goods produced depends on the social
welfare and economic growth.
What to
produce? • Decision is also made by
How to public and private sectors for
produce? different types of goods being
produced.
For whom to
produce?
• Basically goods will be distributed to those who

are affordable to obtain them but somehow
government intervenes directly and indirectly.

Islamic Economic System

Islamic Economic System
• It exists due to failure of the conventional systems.
• Capitalism fails to promote social justice and moral of
the people that lead to materialistic and
individualistic.
• Socialism fails to provide freedom to choose that lead
to depression of citizens. It also fails to increase
standard of living of their people.
• Mixed economy fails to control
social problems as well as increase
in public debts.

Characteristics
Balance between Limited and regulated
private economic freedom.
ownership and • There will be no absolute
freedom allowed by Islam to
public ownership solve economic problems. All
of resources. decisions must based on
• All resources are ‘Syariah’.
belong to the creator
and man is given
ownership to those
resources temporarily. A need for government intervention.
• Government plays a role to ensure the minimum
standard of living of the people, fair distribution
of income and prevent undesirable activities.

Differences between Islamic &
Conventional Economic Systems
• Islamic system is not wealth centered but more to man
centered.
• Islamic system prohibits riba’.
• All decisions making in Islamic system is to achieve al-
Falah not purposely for the benefits of this world only.
• Islamic system focuses more on basic need of people.
• Thus the production of products is based on the
hierarchy of needs.

Philosophic Foundation of
Islamic System
• Main philosophic of Islamic system are based on:
– Hablummin Allah.
• Relationship between man and his creator that
is Allah.
– Hablumminaannas.
• Relationship between man and man.
– And relationship between man and nature.

Tawhid Khilafah Ukhuwah Tazkiyyah
Rububiyah As a trustee of Allah, This is a concept of It is a purification of
We believe that man must use the brotherhood which man’ soul and wealth.
Allah is the one resources in the right encourages people to Therefore, it is a
that nurtures, way according to the be kind and helps each compulsory for a man
nourishes, sustains Islamic law. Man also other in all aspects of to pay ‘zakat’ and give
and develops that must always show a life. donation to the need
lead us toward good example to one.
success. others.
03
02
01 04
Principles
in Islamic
System
Copyright © 2023 Dr. Nurul Nadia Ab
d Aziz 28
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CHAPTER 1

Dr. Nurul Nadia Abd Aziz

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 1

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 2

What good How to How much For whom

• The economy needs to decide the

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 4

For whom • The economy should decide who

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 6

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 6

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 7

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 8

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 12

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 13

• Central control and ownership.

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 19

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 20

• Price of products and services is determined by price

• Basically goods will be distributed to those who

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 22

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 23

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 24

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 25

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 26

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 27

Copyright © 2023 Dr. Nurul Nadia Abd Aziz 29

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