Islamic Producer Behavior - 1 SUPPLY SIDE OR PRODUCER...

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1 SUPPLY SIDE OR PRODUCER BEHAVIOR Table of Contents INTRODUCTION .......................................................................................................................................... 2 SECTION ONE: MOTIVES AND OBJECTIVES OF PRODUCTION ................................................... 3 H AND - TO - MOUTH PRODUCTION .................................................................................................................... 3 P RODUCTION FOR FUTURE CONSUMPTION ..................................................................................................... 4 P RODUCTION FOR THE MARKET .................................................................................................................... 5 S EPARATION BETWEEN MANAGEMENT AND OWNERSHIP ............................................................................... 7 O BJECTIVES OF THE PRODUCER --I SLAMIC PERSPECTIVE ............................................................................... 9 SECTION TWO: FACTORS OF PRODUCTION AND THEIR REWARDS ....................................... 16 I S LABOR THE SOURCE OF VALUE ? .............................................................................................................. 16 T HE E NTITLEMENT OF O WNERSHIP OF THE P RODUCT ................................................................................. 17 (a) The case of not previously owned natural resources: ................................................................. 17 (b) The case of already-owned resources: ........................................................................................ 20 V ENTURES T HAT G IVE R IGHT OF O WNERSHIP OF A P RODUCT .................................................................... 21 V ALUE ADDED AND O WNERSHIP OF P RODUCT ............................................................................................ 22 R ENT , WAGE , PRICE AND INTEREST ............................................................................................................. 24 R ENT , WAGE AND P ROFIT ........................................................................................................................... 28 I S C APITAL A FACTOR OF PRODUCTION ? ..................................................................................................... 32 C ONCLUSION .............................................................................................................................................. 34 SECTION THREE: PRODUCER'S EQUILIBRIUM--ISLAMIC PERSPECTIVE ............................. 35 MAIN ASSUMPTIONS ............................................................................................................................ 35
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2 FIRM'S OBJECTIVE FUNCTION ............................................................................................................ 36 COST ANALYSIS ..................................................................................................................................... 38 FIRM'S AND INDUSTRY'S SUPPLY CURVES ..................................................................................... 41 PROFIT MAXIMIZATION UNDER PERFECT COMPETITION .......................................................... 42 PRODUCER'S EQUILIBRIUM WITH BENEVOLENCE ....................................................................... 44 CHAPTER NOTES ...................................................................................................................................... 48 Introduction This chapter will deal with the theory of producer behavior with special emphasis on issues that are affected by the Islamic viewpoint. It is, therefore, divided in three sections. Section One deals with the motives and objectives of production. Section Two examines the factors of production and their returns, and Section Three discusses the Producer's equilibrium.
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3 SECTION ONE MOTIVES AND OBJECTIVES OF PRODUCTION Why do people produce? This is a simple and basic question which rarely strikes our mind and for which we usually have a ready and simple answer, that is to sell and make profit. This answer carries as much truth as complexity and maybe confusion, in some of the contemporary literature on Islamic economics. To sort things out, it may be appropriate to look in the objectives of the producer during the different stages of human association or 'imran . Undoubtedly, the objectives of production at each stage were influenced by the prevalent process of production during that stage, as the process of production has, itself, gone through different stages of development. Each of the stages has its own effects on the thoughts and ideas of ordinary people as well as philosophers and thinkers. Hence, it will be an interesting exercise to briefly study the objective of the producer throughout different production processes. Hand-to-mouth production For the early humans on earth, the process of production was very simple. They apparently felt hungry and must have thought of trying a fruit which must have looked attractive on certain nearby tree. The simplest form of a production process is, thus, very much mixed with consumption as it takes the form of picking up free goods and making them available for consumption.
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4 Today we tend to think of this process as a part of the consumption operation in that it is usually carried out by consumers not by producers. The objective of this form of production
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