Chapter 5

HOUSEHOLDS:
WORK,
CONSUME
AND SAVING
 Contents
Household and supply of labor

Household and consumptions

Household and savings.

Case 1: 2 sector economy (the simple economy)

Factor Market

Y = rent, wages, profit, interest

HOUSEHOLD FIRMS

1 Consumption (C)

Saving Product Market Investment

(I)
(S)
Financial Market 2
 Case 1: 2 sector economy (the simple economy)
Functions of Household (from Islamic perspective)
LABOR
•offer knowledge and skill in production
process to produce efficient goods for society.

Factor Market
•Work with honesty and responsibility.
•work without delinquent in order to maximize
production and avoid waste of resources.
•earns income for consume and invest in
profitable funds that could stimulate the
LABOR (income) economic growth.

CONSUMER
•use income from labor services to buy
HOUSEHOLD goods that produced in economy.
•Demand only for lawful goods. FIRMS
•Exercise the consumer right by reporting
any fraud in production/low quality of
goods.
•Implement the theory of hierarchy of
needs while shopping to avoid wastage.

1Consumption (C) / •Moderate in spending.

CONSUMER
Saving
Product Market Investment
(S) And (I)
INVESTOR Financial Market
•INVESTOR- invest only in shariah-compliant funds. 2
•Avoid freezing of property
•The fund manager conducts a purification process on the impermissible income generated. The impure income is distributed to
charity/pay zakat.
 Islamic Household Conventional Household

1. Concept of khalifah (as a vicegerent or Rational man – tend to utilize the

administrator of God’s bounties and resources for individual preferences.
resources. – utilize resources for own and
society welfare.

2. Moderate in consumption Aim to achieve higher level of

satisfaction/pride/wealth in life.

3. Ultimate objective = al-falah (success in this Ultimate objective = to achieve successful

world and hereafter) life in this world.

4. Restrict by religious rules – e.g. consume/use Unrestricted behavior

only lawful food/goods.
 Household and supply of labor
 Economists apply the tools of demand and supply to
study the determination of wages, as they apply it to
all prices. Demand for labor, like the demand for any
factor of production, is a derived demand.

 Theconcept of derived demand and the resulting

concepts of physical productivity, value of the
product and revenue productivity should be
explained.
 Household and supply of labor
 Marginal Rate of Substitution

 The rate at which an individual must give up

“good A” in order to obtain one more unit of
“good B”, while keeping their overall utility
(satisfaction) constant.
 The marginal rate of substitution is calculated
between two goods placed on an indifference
curve, which displays a frontier of equal utility for
each combination of “good A” and “good B”.
 Marginal Rate of Technical Substitution
between L and C.
 Rights of labor as
prescribed in Islam
 The workers should be treated with dignity and
honor
 Kindness to workers
 Workers should not be given work beyond their capacity
 Humane and safe environment for work
 They should be compensated if they are injured on the job
 Children or minors should not be used for labor.

 Properand timely wages

 Freedom to form unions
 Household and consumptions
 Principles of Consumption
 The basic principles of consumption laid down by
Islam are three:
 Consumption of lawful (Halal) things, consumption of
pure and clean things and exercise of moderation in
consumption. These principles are briefly described as
under:

 1. Principle of Halal:
 A Muslim has been enjoined upon by Islam to eat only
that food which is ‘Halal’ (lawful and permitted) and
not to take that which is ‘Haram’ (unlawful and
forbidden).
2. Principle of Cleanliness and Wholesomeness
 The Qur’an enjoins upon mankind: “O mankind ! Eat of
that which is lawful and wholesome in the earth, and
follow not the footsteps of devil. Lo! he is an open
enemy for you” (2:168).

3. Principle of Moderation:
 The principle of moderation in consumption means that
one should take the food and drinks with moderation
and avoid excess because excess of intake is harmful
to health.
Case Study
 Consumers are often faced with a conflict
between the needs, benefits, product
and moment in making choice to buy
goods. Student should use the hierarchy
of need or/and the principle of
moderation in other to explain the conflict
between needs, benefit, product and
moment in making decision or respond to
the above advertisement.
 Household and savings

 In conventional economics, people will supply

deposits only when they decide to save instead of to
spend their income on current goods and services.

 The decision to save, that is, postponing current

consumption is much influenced by the amount of
money needed to compensate them from
postponing current spending.

 This saving behavior is explained by the concept of

time value of money (TVM).
 Simple Interest Example:

 Assume that you deposit $1,000 in an

account earning 7% simple interest for 2
years. What is the accumulated interest
at the end of the 2nd year?

 SI = P0(i)(n)
= $1,000(.07)(2)
=$140
Simple Interest Formula: Future Value
 What is the Future Value of the Deposit?

FV = P0 + SI
= $1,000 + $140
= $1,140

 Future
Value is the value at some future time of a
present amount of money, or a series of
payments, evaluated at a given interest rate.
 Household and savings
 In Islamic economics, the spending behaviour of a
household is expected to influence their saving
behaviour as well.

 i.e: consumers who practice moderation (zuhud), will

secure more surplus income. i.e: savings compared
with those who are extravagant (israf).

 Moderation in behaviour is approved by Islam and

applicable only on the consumption of luxuries
(kamaliyat).
 Household and savings
 Hoarding of wealth has been condemned by Islam in
very clear terms, and those who hoard wealth and do
not spend it for good cause have been threatened with
painful doom.
 Hoarding of wealth is a great evil as it tantamounts to
obstruction of flow of God-given wealth from the rich to
the poor who are in genuine need of it.
 Therefore, Islam discourages hoarding of wealth and
instead encourages circulation of wealth among all the
sections of society.
 It is clear that in Islam, wealth is not an end in itself.
Wealth is a means to attain happiness and success. To
do so, Islam enjoins man to spend it well and not to
indulge in hoarding.
THANKS