Price shock in product market: Islamic perspective

Abstract

The future outcome of every economic decision is uncertain. Yet, when making a decision economic agents have to rely largely on the the future outcome of that decision. Whether one has to invest in a business venture one has to estimate its prospective flows of profit ten or fifteen years to come. However, as Keynes (1973: 149-150) emphasizes in his General Theory,"...our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible...our basis of knowledge for estimating the yield ten years hence of...a textile company,...a building in the City of London amounts to little and sometimes to nothing". Therefore, it is more often than not that the outcome misses the target. In economics the deviation of an outcome from its expected value is termed as a shock. Although shock may occur in any variable, it more likely takes place in such variables as price, wage and income due to their relatively high volatility. Of a particular importance is the price shock that may arise from an excessive increase in prices (inflation). One contributing factor is uncontrollable competition among producers which engage them in trade wars. Another important factor is shifts in the supply side due to unexpected increase in input prices. It is expected that different attitudes toward shocks produce different outcomes. In conventional economics agents deem shocks as shortcomings, which deep in their conscience they cannot accept. They would try their best to eliminate shocks altogether. They are so preoccupied with shocks that an economic school hypothesizes economic agents as having perfect foresight because they make the best use of all relevant information at hand. According to this school if shocks still happen that is because they do not fully utilize all information they have, not because they do not nave enough it is due to a failure in fully utilizing information or not enough information.