Economics Definitions and Schools of Thought

Economics Definitions: Different Schools of Thought

• Classical School of Thought: Adam Smith is considered the father of economics, authoring "The Wealth of Nations"
• Neo-classical School of Thought: Alfred Marshall defined economics as the study of mankind's ordinary business, focusing on the attainment and use of material well-being
• Modern School of Thought: Lionel Robbins defined it as the study of human behavior as a relationship between given ends and scarce means with alternative uses.

Micro and Macro Economics

• Microeconomics: Focuses on individual decision units like markets, firms, and households
• Macroeconomics: Analyzes the overall performance of the economy
• Normative Economics: Discusses what "ought to be" or "should be" and cannot be proven or disproven
• Positive Economics: Analyzes economic facts and behavior as they are and can be proved or disproved

Capital Formation

• Definition: Net capital accumulation for a country, reflecting additions to the stock of capital goods
• Stages:
  • Creation of Savings: Depends on individual's will and power to save, influenced by income levels
  • Mobilization of Savings: Transfer of savings from households to businesses for investment, relying on developed financial markets
  • Investment of Savings: Deployment of savings into real capital, requiring investment projects and risk-taking businesses

Economic Systems

• Planned Economy: Government makes all decisions about resource allocation, with minimal market input, and sets prices for resources, goods, and services
• Market Economy: Decisions about resources are governed by market forces of supply and demand, with minimal government intervention, and prices are determined by the interaction of producers and consumers
• Mixed Economy: A combination of planned and market economy where both the private sector and the government participate in resource allocation decisions

The Role of the State

• Government's role in a mixed economy includes addressing market inadequacies:
  • Distribution of Income: Redistributing income to address inequality through taxation and public spending
  • Price Control: Regulating prices of essential goods and services to protect consumers from exploitation by monopolies
  • Interest: Islamic systems prohibit interest, promoting profit sharing and partnership models for financing
  • Monopoly: Government interventions to counter market distortions by monopolies and wealth concentration
  • Economic Freedom: Balancing economic freedom with acceptable economic activity according to Islamic teachings

Islamic Economic System: Features

• State Ownership: Not forbidden but entrepreneurs are free to profit within the system's rules
• Moderation: Emphasizes equitable wealth distribution and sharing
• Prohibition of Interest: Prohibits interest charging, promoting risk-sharing financing practices
• Earnings: Restricted to goods permissible in Islamic teachings
• Ban on Hoarding Wealth: Encourages resource utilization for benefit of society
• Zakat: Financial tax on the wealthy to support the less fortunate

Islamic Finance Models

• Mudaraba: A partnership where the investment company (bank) provides capital and the manager (Mudarib) provides expertise, profits are shared based on agreed terms, and the bank bears any losses.

Production Possibility Curve (PPC)

• Definition: A graph depicting all possible combinations of goods that can be produced from a given set of resources
• Characteristics:
  • Downwards sloping and concave to the origin, reflecting increasing opportunity costs
  • Points along the PPC represent efficient and attainable production levels
  • Points below the PPC are attainable but inefficient
  • Points above the PPC are unattainable with current resources
• Shifts in PPC:
  • Rightward Shift: Increase in resources (labor, capital, resource quality, technology)
  • Leftward Shift: Decrease in resources (e.g., due to war or natural disasters)