Islamic Perspective on Pricing Theory of The

Firm

1

TSR for Better Civilization

2

What is Market?

Contents

Cost Theory Pricing Theory Inplementation

In Reality

Perfect Competettion

What is Market ?

3

The market is a mechanism of exchange of goods and

services that are natural and have been ongoing since

the beginning of human civilization.

The market is an important part in the life of a Muslim,

and can be used as a catalyst for Muslim

transcendental relationship with God, in other words

the market is trading in a Muslim worship in economic

life. This was never done by the Prophet when

migrated to Medina, where he often went to the market

to meet their needs.

Definition

What is Market ?

3

.

Trading in the market based on sharia does not limit the

profit that must be produced, but sharia prohibits fraud

(tadlis), fraud, to lie on the goodness of goods as well

as hide the disgrace (gharar) contained in an item

Qur’an and

Ijma

Al Furqaan 20

Al Furqaan 7

Abdurrahman al-Jaziri : 1970

What is Market ?

3

.

A ban on consuming usury

Honesty in the transaction (muamalah)

A ban on buying and selling activities that aim to trick

/ cheat the buyer or the seller (Bai'Najasy)

A of asymmetric information

A ban on selling goods incomplete ownership

Prohibition of wealth hoarding (Ikhtikar)

The concept of ease and willingness in the market

Islamic

Ethics in

Market

Fair in measures and weights

Market in Perfect Competition?

3

An indefinitely large number of sellers or firms exist.

Thereby, no single firm can influence by itself the prices of

its product or of the factors of production in market

exchange.

Easy entry and exit from the market prevail. Thus no

inefficient firms can continue on in business nor can

single firms capture most of resource and profits.

Undifferentiated output prevails. That is, the products of

all firms are homogeneous and their output levels are

determined solely in terms of prices in the market for the

same type of goods.

Perfect information prevails. That is, the input and

product markets being complementary to each other,

entrepreneurs are assume to have full knowledge of the

factors market as also of the product market

Required to

be Perfect

Competition

Cost Theory

3

Link of Perfect

Competition

and cost theory

Cost Theory

3

Cost of

Production

Output Cost

Revenue Structure It is obvious that total cost of production (TC = C) is a

positive function of output. Revenue (R) too is a positive

function of output, as firms would aspire to make higher

profits by selling and earning at higher levels of output.

This is despite the fact that in the short-run there can

exist negative profits due to a gestation period of

investment and recovery. Hence, with (R - C) > 0,

positive profits are earned. These are called economic

profits because of the concept of alternatives that are

chosen and other ones that are substituted for. (R - C) <

0 yields net investment costs in the short run.

Cost Theory

3

Cost of

Production

MARGINAL COST

AND MARGINAL

REVENUE

RELATIONS:

PRICING, OUTPUT

AND PROFIT -

MAXIMIZA TION

CONDITIONS

Cost Theory

3

Cost of

Production

MARGINAL COST

AND MARGINAL

REVENUE

RELATIONS:

PRICING, OUTPUT

AND PROFIT -

MAXIMIZA TION

CONDITIONS

Marginal revenue can likewise be derived in the same

way as marginal cost. The additional unit of revenue

per unit of increase in output is known as marginal

revenue, MR. That is, MR = dRldq, with total revenue

being R = R(q). Likewise, additional cost per unit of

increase in output is known as marginal cost of

production, MC. That is, MC = dC/dq, with total cost

being C = C( q). The decision for the firm to produce or

not depends upon whether, MR> MC or not,

respectively. Finally, with all the above results in the

situation where the firm is a pricetaker in perfect

competition, we obtain the compressed result for

pricing of output of a firm in perfectly competitive

market: p = MC = Min. AC = AR = MR.

Pricing Theory

3

PRICE

THEORY,

AND THE

MARKET

MECHANISM

And they say: "Why does this Messenger eat food, and walk

about in the markets. Why is not an angel sent down to him to

be a warner with him'‘ (Al-Furqaan; 7)

AL QURAN VERSES WHICH THE THEORY OF PRICE

& MECHANISMS MARKET ECONOMY IN ISLAM

Pricing Theory

3

PRICE

THEORY,

AND THE

MARKET

MECHANISM

Economic practices at the time of the Prophet and

Khulafaurrasyidin indicate the role of a big market. Prophet

greatly appreciate the price established by the market as a fair

price. He rejected any intervention price if price changes occur

due to fair market mechanism. However, here the market

requires morality (fair play), honesty (honesty), openness

(Transparency) and justice (justice). If these values are upheld,

then there is no reason to reject the market price.

Role of The

Market

Pricing Theory

3

PRICE

THEORY,

AND THE

MARKET

MECHANISM

1. Rida, ie, all transactions should be done on the basis of

willingness among each of the parties (freedom of contract).

This is in accordance with the Qur'an Sura al-Nisa 'verse 29:

Mechanism Market Principles In Islam

Pricing Theory

3

PRICE

THEORY,

AND THE

MARKET

MECHANISM

2. Based on fair competition market mechanism will be

hampered work in case of hoarding (ihtikar) or monopoly.

Monopoli each item that detention would harm consumers or

crowds.

3. Honesty, honesty is a very important pillar in Islam, because

honesty is the other name of truth itself. Islam forbids firmly

commit falsehood and deception in any form. Therefore, the

value of this truth will have a direct impact to the parties to a

transaction in commerce and society at large.

4. Disclosure (Transparency) and justice. Implementation of

these principles is required for transactions carried out

correctly in the disclosure will prevail and the real situation

Mechanism Market Principles In Islam

Pricing Theory

3

PRICE

THEORY,

AND THE

MARKET

MECHANISM

Islamic economic theory regarding the price. Prophet

Muhammad in the hadith does not determine the price. This

shows that the conditions it is left to the market mechanism

impersonal nature. Prophet rejected the offer and said that the

market price should not be set, because it is Allah who decide

It's amazing, the theory of the Prophet about prices and

markets. Admiration is due, the Prophet's speech implies that

the market price in accordance with the will of God that the

laws or the laws of supply and demand.

According to contemporary Islamic economic experts, this is

the theory adopted by Western economists, such as Adam

Smith with the name of the theory of invisible hands.

According to this theory, the market will be governed by the

hands of invisible (invisible hands). Is not the theory of

invisible hands it is more correct to say God Hands (hands of

God).

The Principles of Islam in Pricing Theory

Pricing Theory

3

Islamic

pricing

theory Banning transactions Bai Najasy. Najasy transactions

forbidden in the trade because the salesman told other

people praise the goods or bid at a higher price, so that other

people are also interested to buy it. The level of demand that

occurs is not produced naturally

Prohibition Ikhtikar (Monopoly)

Prohibition of fraud (tadlis). Tadlis containing transaction is a

thing that is not known by any of the parties unknown to one

party. Tadlis (fraud), can occur in 4 (four) things, namely in:

1. quantity; 2. Quality; 3. Price; and 4. Delivery Time

.

Hadith :

From Ma'mar bin Abdullah bin Fadhlah, he said, I heard the Prophet said, "Do not do

ihtikar unless the guilty (innocent)". (H.R.Tarmizi)

Banning transactions Talaqqi Rubban. Talaqqi Rukban, trader

activity is a way to meet village traders who carry merchandise

on the street (to the market).

Implementation

3

Now is the time

to implement the

Islamic

Principles as the

part of your life

for better

civilization

Greetings: Syukron

3