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DERIVING DEMAND CURVE IN ISLAMIC

ECONOMICS 1

Conference Paper June 2012

DOI: 10.13140/2.1.2391.9689

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 DERIVING DEMAND CURVE IN ISLAMIC ECONOMICS1

Jaka Sriyana
Universitas Islam Indonesia, Yogyakarta.
jakasriyana@uii.ac.id

Abstract

Demand theory is one of the major topics in Islamic micro economic theory. This paper
aims to provide an alternative derivation of the demand curve in the Islamic economics
approach. This study uses deductive theoretical approach as a paradigm of Islamic
economics epistemology. In this case, the derivation of demand curves is developed
using mathematical and graphical approach. The result of this analysis provides an
alternative individual Muslim's demand curve, which is a function of the price of goods
as the implementation of consumer equilibrium. This equilibrium is the intersection
point between the budget line and mashlahah curve. Budget line represents maximum
limit of individuals wealth and income, while mashlahah curve is a maximum benefit
achievement from his/her benevolent spending (Zakah, Infaq, Sodaqoh, etc.), savings,
and purchases for goods and services. This paper concludes that the Muslim decision to
buy a product and services is determined by not only its prices, but also the decision of
benevolent spending, saving allocation, and also is influenced by his/her maximum
wealth and income.

Keywords: demand, consumer, prices, curve, benevolent.

INTRODUCTION
The study of consumer behaviour which leads to the understanding of the
demand curve for goods and services is one of the key studies in Islamic economics. It
is widely understood that economically, wealth and income are the most important
factors for individuals in purchase of goods and services. But, more important thing is
the explanation of the allocation of wealth and income is consistent with the concept of
Islamic economics based on of Islamic values that has a perspective of the hereafter.
In fact, individual consumers will meet certain conditions regarding the
availability of the goods and services they want. The level of wealth and income will
affect the individual demand. This argument is that some people who have more income
and wealth, they feel comfortable paying more for their consumption. This means either
buying in larger quantities of goods and services or better quality with higher spending.

1
Paper presented at Third International Workshop in Islamic Economics (IWIET 2012),
Jogjakarta, June 19-20, 2012.
1
Effects of wealth and income in consumer demand depends on the ability of consumers
to manage their wealth and income that is ready for consumption. In other words,
besides the size of wealth and income, and their plan for consumption, they can also be
affected by other person's demand.
Religious beliefs affect consumer choices in distributing their wealth and income.
All human beings like to have wealth and have a need for the future consumption. They
also want to leave some wealth as an inheritance for their children and other family
members. They also want to set aside some savings for the charity which is influenced
by religious beliefs as the pillars of faith. In addition, religious beliefs and values affect
the proportion of consumer income is given in terms of kindness and charity. All
humans have the grace to others, and love for their family. All people usually have an
inner desire to help others on humanitarian grounds. This desire is usually increased
with religious beliefs (Kahf, 1996).
The commandments of Islam affect individual choice because of the effects due
to their internal and social forces. Religious beliefs, cultural values and religious are
important factors of consumer choice to determine the products and affect the quantity
of goods and services consumed by the concept of simplicity and the prohibition of
waste (israf). Religion also influences the seasonal movements in consumer demand due
to religious activities and celebrations. Religion and culture also affect the pattern and
plan to define the extent of their consumer relating to their job. Islam advocates
Muslims to have a good relationship with their family and among their society, and to
help for each other. These factors contribute to the formulation of Muslims consumers
plans and reach a final decision on the demand in the market.
Generally, among Muslim economists have two different views in defining
Islamic economics methodology. This disagreement is due to their differences in
interpreting the nature and subject of Islamic Economics. First, the group that defines
Islamic economics as a set of basic Islamic economics principles derived from the
Qur'an and Sunnah. This view is a complete doctrinal theory to regulate economic
behaviour that absolutely is textually derived from the Qur'an and Sunnah. Second, the
group that defines that Islamic economics is economics in general are also inspired by
Islamic values. It accommodates empirical facts developed in the community as a
2
variable that cannot be avoided in developing Islamic economics as a science of
economics (Haneef and Furqani, 2008).
In this paper, the analysis is conducted more based on the first sight. Based on
this concept, Islamic economics is a doctrine of science, where the rules of the
methodology used did not follow the methodology of conventional economics in
general. It is based on the principle that Islamic values that has a set of basic principles
that are most likely to offer its own system. A conventional economics method is not
sufficient as a basis of theory, because it was limited to explaining the phenomena and
facts without dealing with the norms and religious values. Meanwhile, Islam provides
the basic principles in which theory and economic policy can be formulated. These
principles are upper structure, as the foundation formulated various policies and theories.
Theoretical construction of Islamic economics is closely related to the implementation
of the message in Quran and Sunnah.

RELATED LITERATURE
The process of discovery of a theoretical development in Islamic economic
should pay attention to things that are supposed to do and the things that should be
avoided. With this understanding, a main paradigm in the formulation of Islamic
economics theory is theoretical deductive method. On the basis of this, it is crucial to
follow the rules of fiqh as a basis of further development of Islamic economic theory. So
far, Islamic economics also intensively concern with the topics of consumers and
producers behaviour, such as production, distribution, pricing, and consumption, etc.
Furthermore, some challenges of the development of Islamic economic theory are to
develop the possible formulation according to Islamic principles.
Islamic economics has the ultimate goal as well as the goal of Islamic law
(maqasid asy-shari'a) is to prosper in the world and the hereafter (falah) through a good
system and honourable life. According to Wehr (1960) falah, as an ultimate goal of
Muslim, is derived from the Arabic word, aflaha-yuflihu means thriving, prosperity,
salvation, welfare, and success. In the context of life in the world, falah is a multi-
dimensional concept. It has implications on the aspect of individual behaviour in the
micro level and collective behaviour in the macro level. Falah includes a complete and
3
comprehensive aspect of human life. These aspects are including spirituality and
morality, economic, social and cultural, and political. For example, to obtain a survival,
then the micro aspects of human needs as follows: (a) biological needs, such as physical
health or freedom from disease, (b) economic factors, such as having the means of life,
and (c) social factors, such as the brotherhood and interpersonal relationships. In the
macro aspects, well-being requires a balance of ecological, environmental hygiene,
environmental management, and cooperation among members of society. These factors
will be complete if the man is also free from poverty and have the strength and honour
(Kahf, 1996).
Falah, a glorious and prosperous life in the world and hereafter can be achieved
if the needs are met in a balanced human life. In this situation, Muslims should optimize
their economic activity in order to cover their needs for getting mashlahah. According
to Khan (1992), mashlahah is the property or power of a good or service that prompts
the basic elements and objectives of the life of human beings in this world. This
definition suggests that mashlahah are any circumstances, both material and non-
material capable of enhancing the position of Muslim as the noblest creatures. Thus, it
implies that mashlahah has benefits in the world and the hereafter. Mashlahah basis for
human life consists of 5 (five) cases, the religion (den or faith), soul (nafs or life),
intelligence ('aql or intellect), family and descendants (nasl or posterity) and property (a
mall or property). The fifth case is a basic human need, which is an absolute
requirement to be met so that people can live happily in this world and hereafter. If any
of the above requirements are not met with out of balance, then the happiness of life is
also not perfectly achieved. These aspects are the foundation of Islamic economic
theory development.

Consumer Behaviour in Islamic Economics

Consumer behaviour is all the activities, actions and the psychological processes
that drive the action in finding, buying, using, evaluating, and spent the products and
services, including the decision processes that precede and follow these actions. In other
words, consumer behaviour is the study of how decision makers, whether individuals,

4
groups or organizations, make decisions to buy or the purchase of a product and
services and how to consume them.
Islamic Sharia has a set of ethics and norms of consumption derived from the
Islamic teachings of the Qur'an and Sunnah. Mannan (1986) proposed 5 (five) values
and ethics in Islamic consumer behaviour, namely the principle of fairness, cleanliness,
simplicity, generosity, and morality. While the basic norms and ethics in the
consumption of wealth in Islam is spent away from stingy, waste, and do simplicity.
Islam regulates all human behaviour to meet various needs. In the matter of
consumption, Islam also regulate how humans can conduct their consumption activities
will give benefits in his life. Thus, the theory of consumer behaviour in Islamic
perspective is built on the basis of Islamic Sharia, which turned out to have fundamental
differences with the conventional theory. This difference is related to the basic values
on which the theory, the motive and purpose of consumption to the technique of choice
and the budget allocation for consumption. Therefore, the discussion of consumer
behaviour in Islamic perspective starts from a brief discussion of definitions and models
of consumer behaviour, then discussed the concept of economic rationality in Islam,
mashlahah in consumption, and derivation of demand curve.
Hoetoro (2007) explains the differences the basis concept of conventional
economic rationality and Islamic economics. The concept of rational economic in
Islamic economics has a main purpose to maximize mashlahah of Muslims activities.
The concept of rational economic in Islamic economic has a wider dimensions than that
in conventional economics, which is not only limited to the satisfaction of personal
interests in the world, but also consider the social-interest and devotion to God.
In the context of more specific of rationality in the consumption, Khan (1992)
distinguishes between mashlahah and satisfaction or utility. Mashlahah connected with
the need, while satisfaction or utility is connected with the desire. He derives the
outlook on the Sharia concept of mashlahah leading to benefit of servants or human.
Theoretically, the economic rationality in Islam is built base on the axiom that derived
from Islam values which is universally applicable in accordance with the universality
of Islam. Axioms that are universal above, supported also by the other axioms are only
believed in Islam, namely: the existence of life after death in the world, the afterlife is
5
the final revenge for the life of the world, and excellent source of information is Qur'an
and Sunnah.

Mashlahah in Consumption.
Conceptually, Islamic economic is developed base on the Islamic concept of
rational economic to maximize mashlahah. Thus, consumer behaviour is driven by
Islamic motif needs to achieve maximum mashlahah. Therefore, in the context of
Islamic Economics, Muslim has to choose the goods and services that provide
maximum mashlahah accordance with the view the Islamic economic rationality (Kahf,
1996; Misanam, et.al., 2008). This is in contrast with the view of consumer behaviour in
the conventional economy that tends to maximize satisfaction or utility. To understand
the difference between mashlahah and satisfaction, it first needs to understand the
difference between needs and desire.
Consumption activities to buy or have a good or service can arise because of the
demand or desire. Needs is related to everything that must be met for an item to
function properly. While the desire or want is associated with a person's desire or
expectation that improves the function of human perfection. This is because human
beings basically have a tendency to desire good and bad desires at once. Human desire
is driven by the strength of the human self or inner power, which is called by the nafs,
which is personal and often are not always in line Islamic rationality. Therefore, in the
Islamic economics, humans must control and direct his faith so as to bring benefits
(mashlahah) and not the loss (madharat) for the life of the world and the hereafter.
Islamic teachings do not forbid people to meet their needs and wants, as long as it can
lead to the fulfilment of human dignity increased. In other words, fulfilling the needs
and desires still allowed as long as it is able to add or not to bring mashlahah madharat
(Muflih, 2006).
As mentioned in the economic rationality in Islam, every economic agent aims
to acquire mashlahah not only getting utility. Mashlahah is associated with the need,
while satisfaction or utility is connected with the desire or want. Thus, satisfaction is a
result of the fulfilment of a desire, while mashlahah is a result of the fulfilment of a
requirement. However, the fulfilment of a requirement would also provide satisfaction,
6
especially if the need is recognized and desirable so that consumers will feel the
satisfaction mashlahah well. In contrast to the individualistic gratification, mashlahah
not only be felt by individuals, but can be shared by another person or group of people.
In the context of consumer behaviour, the concept of utility is defined as the
concept of consumer satisfaction in the consumption of goods and services. While in the
Islamic economic, mashlahah is defined as a consumer behaviour mapping based on the
principle of needs and priorities. The two concepts are different because it is formed by
a different epistemology. Utility has the characteristics of epistemology western
freedom, while mashlahah is developed base on Islamic epistemology.
The concept of utility can shape the perception of materialistic satisfaction.
Satisfaction was measured according to the materialistic satisfaction derived from goods
and services consumed by people. Along with that, the perception of want as consumers
who are pursuing the development of rational desire to achieve satisfaction and self-
interest motives drive the materialistic satisfaction perceptions to make decisions in
their consumption. Thus, theoretically consumer decisions are influenced by perceptions
of a materialistic satisfaction that was driven by the perception of want and self-interest
(Muflih, 2006).
Mashlahah be obtained by the consumer in consuming a goods or services in the
form of worldly benefits, including: (1) material benefits, the acquisition of additional
property for the consumer due to purchases of goods or services, such as cheap price,
discount, low cost of transportation, etc., (2 ) physical and psychological benefits, the
fulfilment of human physical and psychological needs, such as hunger, thirst, cold,
health, safety, dignity, and so on, (3) the benefits of intellectual, human sense of
fulfilment in consuming a good or service, such as the need of information, knowledge,
skills, etc., (4) the benefits to the environment, in the form of positive externalities from
the consumption of goods and services or benefits to be felt by other than the buyer in
the same generation, and (5) long-term benefits or a long-term temporal fulfilment
(Misanam, et. al., 2008).
Muflih (2006) explains that the concept of mashlahah can form perceptions to
prioritize the basic needs before reaching others. Along with that, the intention of
consuming goods and services are encouraged with the intention of worship to God for
7
getting mashlahah. In addition, the concept mashlahah is not in tune with the perception
of harm, such as the illicit goods, and endanger yourself or others. Thus, Muslim
consumer decisions are influenced by perceptions driven by the needs of worship, and
perceptions of harm refuses to build their preference.
According to Khan (1992), Muslim consumption preferences are covering 4
(four) options, namely (a) the temporal needs and the needs of worship, (b) current
consumption and future consumption, (c) dharuriyyah needs, requirements and needs
tahsiniyyah hajiyyah and (d) a variety of free choice. Islamic economics includes four
options, whereas conventional economics is only limited to the second and fourth
options only and ignore the first and third options. This is caused by the conventional
economic concept of rationality that is driven by motives of self-interest so that the
motif would affect the consumer decision process. In the Islamic economic, the process
of consumer decision is motivated by perceptions of the priority needs according to
Islamic values, the intention of worship, and long term welfare perspective. These
perceptions are the determinant of wealth and income allocation for Muslim.

ANALYSIS APPROACH: DERIVING THE DEMAND CURVE

To perform the analysis of consumer behaviour in Islamic economic approach
must refer to the Islamic economic economics. In Islamic economics, an individual is
assumed to maximize mashlahah from their various activities. In other words, Muslim
also maximizes the usefulness of goods and services as an implication entirely based on
Islamic values. But, what to be maximized is a function of mashlahah rather utilitarian
function in the conventional economics. Muslim consumers maximize a function that
contains a complete list of sources mashlahah obtained by using a variety of economic
activities. These sources include the economic benefits and customer satisfaction,
benefit and enjoyment gained to others and being: individual, group and community
service to the cause of Allah and the promotion of religion, faith and goodness. They
also include the efficient use of human and material resources, present and future, as
this is covered in a few words of the Prophet Muhammad SAW, and the impact of
economic decisions. The latter include non-economic effects on the welfare of other
people, creatures and the decision in the next (Kahf, 1996).

8
 Demand schedule as derivation of consumer preference, describe the
relationship between quantity and price are the ancient instruments mentioned by some
Muslim writers in the early second century. It was also mentioned with more details by
Ibn Taymiyyah in the ninth century. Preference maps depicting the same line to the
customer satisfaction is another tool that is used to indicate the two or more dimensions
of the consumer preferences. Mashlahah curve describes some possible choices to the
consumer preference in certain circumstances and conditions under Islamic values. This
approach is closely related with Islam rules as long as the definition of the mashlahah
function of the underlying variables is consistent with the above discussion.
Consumer behaviour theory, as developed in the West after the advent of
capitalism, is an instance of the doctrine of economic rationalism and utilitarianism.
Economic rationalism interprets human behaviour as being founded on rigid calculation,
directed with foresight and caution toward the economic success. Utilitarianism is the
source of moral values and attitudes. In the Western tradition, the theory of consumer
behaviour has emerged and considers the maximization of utility as a consumer
destination. Utility should be maximized in order to achieve the highest satisfaction.
Consumer behaviour theory under the capitalist system has gone through two
stages. The first stage is associated with marginal theory, in which consumer utility is
measured in units of the cardinal. A consumer reach equilibrium when the utility is
maximized with the constraints of income, namely, when the ratio of marginal utilities
of various commodity price equal to the ratio of their money. The second stage rule out
the more modern and cardinal utility. However, maximization is now a condition of
equality between the marginal rate of substitution, i.e., the slope of indifference curves,
and the ratio of the price of money, the slope of the income constraint. Some Muslims
have seen the development of the economy earlier than the limited rationalization of
consumer theory and the dimension of human behaviour is concerned. Other
alternatives can also be proposed as an alternative that is consistent with the values of
Islam and at the same time being able to explain the behaviour of Muslim consumers.
According to Kahf (1996), consumers will be in their equilibrium when they can
achieve mashlahah according to their income and assets owned. A Muslim consumer is
to maximize success in the rational world and the hereafter will adjust the use of income
9
and wealth to achieve maximum success, namely mashlahah. If it is assumed that for a
given period, e.g. one year, the individual Muslim consumer is endowed with a number
of wealth (w) and income (i) a budget that reflects the total capacity (y). Consumers can
use the gift of wealth and income to savings (s); benevolent spending for duty in the
way of Allah SWT as Muslims (Zakah, Infaq, Sodaqoh, etc.) (b); and expenses the
consumption of goods and services available in the market (q). A rational behaviour
would choose a combination of all three alternatives so as to maximize mashlahah. This
means that consumer will allocate his/her wealth and income so that:

y=s+b+q (1)

y=w+i (2)

Equation (1) states that the allocation of wealth and income are used in three ways
above, s, b, and q. The budget constraint is depicted in Figure 1.
s

h
0
q
g

b
Figure 1

Axis s, b and q in Figure 1 show the expenditure for savings, benevolent

spending, and purchase of goods and services by consumers. Point f, g and h which are
the point of intersection with each axis s, b, and q indicate the maximum level for each
type of expenditure is. For q axis which is the expenditure for the purchase of goods and
services by consumers can be assumed as expenditures for all goods and services.
10
Therefore equation 1 can also be a budget constraint (a) for the consumer. However, to
simplify the analysis, drawing budget curves in three axes is simplified into two axes,
where savings add up the expenses for the benevolent spending, as illustrated in Figure
2.

b+s = y

0 q

Figure 2

Further analysis, it is needed to discuss about consumers plan of mashlahah

obtained from the allocation of wealth and income. If m describes mashlahah consumers
from using the wealth and income to savings, benevolent spending, and consumption,
then mashlahah function can be written:

m : f (s, b, q) (3)

This equation reflects the contribution of each individual allocation of income

and wealth in the pursuit of his/her mashlahah. Functional relationship (f) shows the
influence of each independent variable on mashlahah. Furthermore, in order to perform
the derivation of demand function, then the drawing mashlahah function use two axis,
where the first axis is the sum of the savings and benevolent, while second axis is
purchases for a certain commodity, as described in Figure 3. The figure shows a map of
the preferences of consumer decisions that are convex towards the centre point and
describe possible changes in individual spending in achieving mashlahah (m).

11
 y

E1
y1
y2 E2 m

0 q1 q2 q

Figure 3

Next analysis is to find the individual equilibrium point of the consumer that
describes the individual decisions in allocating wealth and income. Individual decisions
occur at the point of intersection between the mashlahah curve and budget line, as
described in Figure 4. Individual consumer will decide to allocate his/her wealth and
income on savings and benevolent (ye), and on spending for commodity (qe). The
maximum point to buy this commodity is qmax, while the allocation for minimum
benevolent spending is ymin. Every individual Muslim has the obligation to allocate
his/her wealth and income for zakah so that the minimum allocation of benevolent
spending is not equal to zero.

ymax

E
ye
m

ymin a

0 qe qmax q

Figure 4

12
 Further analysis needs to do in order to find the individual demand curves for a
certain commodity (q). If an individual consumer is assumed to be at equilibrium, which
is the point E1 in Figure 5. At that point the individual spends his wealth and income for
buying q at the amount of q1. If the price of q is p1, so intersection between q1 and p1
will be at point F1. If it is assumed that the prices of q decrease from p1 to p2, then the
budget line a1 will shift to the right, a2. If q is assumed to be normal goods, then the
consumer ability to purchase q becomes more. If individual consumers decide to buy
more q, i.e. on q2, then the new equilibrium for the individual is in E2. Based on these
two points, (E2 and p2) it is possible to draw point F2 as the intersection point between
the new price levels (p2) with the amount purchased (q2). By connecting the F1 and F2,
then the individual demand curves for goods q can be drawn, that is Dq. The demand
curve reflects consumer preferences for commodity q with several determinants, the
price of q, the allocation for benevolent spending, and allocation to the saving.

13
 y

y1 E1

y2 E2
m1 m2

a1 a2
0 q1 q2 q

p1 F1

p2 F2
Dq

0 q1 q2 q

Figure 5

CONCLUSION
This paper attempts to provide an alternative of deriving the demand curve. From the
discussion, this paper give an individual Muslim's demand curve as a consequence of
the of the consumer equilibrium. Equilibrium point is the intersection between the
budget line from the maximum limit of individual wealth and income of consumers,
with a maximum mashlahah curve which is a benefit from the wealth and income
allocation decisions for benevolent, savings, and purchasing goods and services. It can
be concluded that the individual decisions to buy goods and services is determined by
not only the main attributes attached to the goods, such as the price of goods, but also is

14
 influenced by his decision for benevolent spending and saving for the interest in the
future.

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