Econ Lec by 2vt3T6


									                  Ministry of Health of Ukraine

          Donetsk National Medical Gorky’s University

   Department of Philosophy and Social Sciences and Humanities

  V.Alexandrovskaya, V. Belousova, D. Korjova

              Economic theory
Lectures for English-Speaking Students
  of Higher Educational Institutions

                        Donetsk 2009
       ББК 60.5.73
       УДК 316 (075.8)

Economic Theory. Lectures for English-speaking students of higher educational institutions. –
Donetsk: Gorky’s Donetsk National Medical University, 2009. - 76 p.

                     V. Alexandrovskaya, Doctor of Philosophy, Associate Professor of
              Department of Philosophy, Social Sciences and Humanities of the Donetsk
              National Medical University
                     V. Belousova, teacher of Department of Philosophy, Social Sciences and
              Humanities of the Donetsk National Medical University.
                     D. Korjova, teacher of Department of Philosophy, Social Sciences and
              Humanities of the Donetsk National Medical University.

Sciental reviens :
                     Grebenkov G., Doctor of Philosophy, Professor
                     Davidov P., Candidate of Philosophy, Associate Professor

        Approved at the Academic Council of the Donetsk National Medical University
                             (Minutes 8, 28th November 2009 )

                                                                        ББК 60.5.73
                                                                      УДК 316 (075.8)

                                     LECTURE 1.
                        Subjects and methods of economic theory.

        1. Development of economic theory as a science.
        2. Subject, methods and functions of economic theory.
        3. Economic system: meaning, material base and its role in economy.

1. Development of economic theory as a science.
1) Definition of economics, its role in economy.
During centuries people were trying to understand economic processes (Aristotle (384-
322 BC), Plato, Xenofont etc). Though, the first economic teachings appeared only in
XVI AD, and the term “political economy” was firstly used only in XVII AD (A.
Montchretien “Treatise on political economy”, 1615). Further history of the science
development is a deep research of different sides and laws of economy which is
understood as the totality of branches of economy, providing society with necessary
goods and services.
2) Historical differentiation of economic concepts.
In the history of mankind the following teachings can mentioned:
a) Mercantilism (from Italian “merchant”) – XVI-XVII; representatives: W. Stafford,
    T. Men, A. Montchretien etc. They believed money in the form of gold and silver to
    be the major wealth of nation and a state and proposed different methods of its
    attraction to the country.
b) Physiocratism (from Greek “physis” – nature, “cratos”- power. Its founder is F.
    Canae, XVIII. The research of the question about the origin of a surplus was drawn
    from the sphere of circulation to the production sphere, agriculture mainly, which
    was considered to be a producing one; industry was defined as processing a product
    only, manufactured in agriculture.
c) Classical school of political economy was founded by W. Petty, A. Smith, D.
    Ricardo (the second half of XVIII – the beginning of XIX). It was based on the
    theory of labour cost; employees’ labour was defined as the source of income. They
    researched the mechanism of social capital increase, proved the inadmissibility of a
    state interference in economy, the necessity of free trade.
d) Marxism (the middle of XIX) was founded by K. Marx and F. Engels. The deepest
    analysis of capitalism, its main categories (capital, income, salary etc), laws and
    market mechanisms was done by the representatives of the school.
e) Marginalism (from French “borderline”) – the representatives were: D. Clarc, A.
    Marshall, E. Bem-Baverk. They stood on position of the refusal of the discussion of
    social aspects of capitalist economy, so instead of the term “political economy” they
    started to use more neutral term “economics” (economic theory). It has many trends,
    but the main idea is capitalism capable of self-control and balance achievement in
f) Keynicians (1930s), its founder was J.M. Keyns. The main idea is the explanation of
   the necessity of state regulation of economy and the elaboration of its definite forms
   because a spontaneous market mechanism is not able to solve the problem of cyclic
   fluctuations and unemployment.

3) Modern economic theories are:
a) Neoclassicism grounds a statement that the most favorable conditions for economic
   units domination are the conditions of pure competition (A. Marshall, A. Pigue);
b) Neoliberalism grounds the necessity of joining the principles of free competition
   with a state regulation of economy (L. Mises, F. Hayek, A. Muller-Armak etc);
c) Monetarism is one of the directions of neoclassic economic thought that appeared
   in the mid 50s in XX, the USA. It was founded by the head of Chicago school of
   political economy M. Fridmen. According to the theory, the main element of market
   economy is money and that’s why its regulation is to be based on the regulation of
   money in circulation.
d) Institutionalism is one of the directions of Western economic thought that appeared
   in the end of XIX – at the beginning of XX; it concentrates mainly on the analysis of
   the role of institutions in decision-making and in economic activity, their purposes
   and effectiveness (T. Weblen, D. Commons, W. Hamilton etc). Competition, labour
   unions, taxes, state monopolies, juridical norms and others are considered to be
   institutions; economy is considered as a system of relations between subjects of
   economy, that is formed under the influence of economic and non-economic factors
   (technologies are one of them).

2. Subject, methods and functions of economic theory.
1) The subject of economic theory are relations and ties that appear between people
while production, distribution, exchange and consumption of goods and services.

2) The aim of economic theory is to define laws and essence of economic phenomena.

3) Nature and essence of economic laws.
a) Nature of economic laws. Economic phenomena and processes are subordinated to
   the objective laws, which are commonly called economic ones. They are of the
   objective character, i.e. they don’t depend on human will and consciousness, but at
   the same time they are not historically eternal, they change with the change of
   conditions of economic life.
b) Essence of economic laws. Economic laws express the essence of phenomena and
   the level of their cognition by a person. They reflect stable, causal relationship
   between these phenomena or processes. They are typical and variable, that’s why
   they form a definite system of economic laws that correspond to this or that way of
c) Classification of economic laws:
      - general – the laws, typical of all ways of production of all epochs;
      - special – the ones, typical of the ways of production of the same type;

      - specific – the laws, typical of definite ways of production with definite
         economic conditions.
d) Functions of economic laws. The objective nature of economic laws presupposes not
   only the necessity, but also the possibility of taking into account their demands in
   economic practice. It allows to elaborate a scientific mechanism of regulation of
   social production and to use the knowledge of economic laws while decision-
   making. Thus, the functions of economic laws are:
      - to reflect the objective state of economy;
      - to anticipate the necessity and possibility to use them in economic practice;
      - to promote the elaboration of a scientific mechanism of social production
      - to use the knowledge of economic laws while decision-making.

4) Methodological system of economic analysis:
a) The major method of economic processes cognition is the one of materialistic
   dialectics. It’s based on the idea of matter primacy while defining the meaning of
   consciousness. Dialectic al approach means:
      - phenomena are considered not in statics, but from the moment of birth to
      - development is considered from the simple to the complicated, from the
         lowest to the highest;
      - a transition from the concrete to the abstract and again to the concrete is
         observed while research;
      - contradictions and their elimination are considered to be the moving force of
b) Other methods of economic researches.
      - analysis and synthesis. The cognition of economic phenomena presupposes
         their analysis – the division of phenomena into elements and this elements
         research; synthesis is a formulation of conclusions and laws on the basis of
      - scientific abstraction. It means that it is necessary to abstract from accidental
         and transient moments and to define typical and constant features;
      - deduction – a theory proof by means of facts;
      - induction – drawing up principles and conclusions from facts.

5) Functions of economic theory:
a) theoretic - cognitive function is aimed at depicting the essence of economic laws
   and categories and essential causal relationships of economic phenomena and
   processes, forms of their expression, their typical inner contradictions, the
   development of which ensures successive economic progress of society, as well as
   the mechanism of laws realization;
b) practical function is aimed at a full explanation of definite ways of economic laws
   application and overcoming the forms of contradictions that stop the development of
   economy, thus at formation of a scientific base of economic policy of a state.

c) ideological function is aimed at the formation of the new type of economic-
   theoretical thinking of officials of different ranks;
d) methodological function:
      - serves a base of the use of general scientific and philosophic principles and
         dialectics categories for most of the economic disciplines as well as for
         economic theory;
      - grounds fundamental economic categories for these disciplines with the
         account of historical method;
      - gives the knowledge of the most important means of development and
         perfection of economic system and as a result of it influences the cognition of
         ways of development of definite branches of economy.

3. Economic system: essence, material base and role in society.
1. The essence of economic system. Economic relationships function as a definite
system that includes objects and subjects of these relationships and different forms of
their connection. The economy of every country is a large system, consisting of many
different types of activity, and every component of the system can exist only because it
is connected to other ones. Economic system is a specially organized system of
connections between producers and consumers of goods and services.
2. Properties of economic system. Economic system is in a constant development and
possesses definite properties: integrity, organized structure, stability, contradictoriness
and mobility.
3. Material base of economic system. Forces of production are the material base of
economic system.
a) Forces of production are the factors that ensure the transformation of natural
    resources according to human needs, create material and spiritual values and define
    the increase of productivity of social labour.
b) The elements of forces of production are means of labour, subjects of labour and
    people who have experience in production and make means of production and
    natural forces, used by people (wind, sun, hydro recourses etc) move.
c) As a result of a constantly renewed process of interaction of all elements of forces of
    production social forces of production, like cooperation and labour division appear.

4. Place and role of economic system in society.
Integrity, as well as a high level of organization and effectiveness of modern developed
economic systems depends on how strong its humanistic, democratic and ecological
orientation is.
a) Humanistic orientation means subordination of economic systems development to
   greatest moral, cultural and human values of working people.
b) Democratic orientation much depends on two main factors: on the degree of
   economic relations democratization (the relations of economic property mainly) and
   on the degree of employees’ participation in production and property management,
   their influence on economic mechanism.
c) Ecological orientation presupposes the formation of such an ecological-economic
   system that would save nature, promote satisfaction of increasing ecological needs
of society (clean air, environmentally safe products etc) and implementation of
technologies that wouldn’t damage environment.

 5. Types and models of economic systems.
   a) Criteria of economic systems classification. Major characteristic of society
      types that were passed by mankind in its development is the characteristic
      from the point of view of property of means of production.
   b) The priority of property criterion is defined by:
   - firstly, by the fact that property is a multisided sociologic category in which
      many aspects are distinguished; property reflects the whole range of
      relationships between individuals, classes, states and other subjects;
   - secondly, social and economic progress and stimulus to labour depend on a
      type of economic system;
   - thirdly, the all-round development of mankind presupposes not only the
      progress of employees but also the one of employers.
   c) According to property criterion, there are three types of economic systems:
   command, market and mixed.
   - Command economy is characterized by a state form of property of most of
      enterprises which act according to the directions of a single economic plan.
      It’s regulated by administrative methods.
   - Market economy is characterized by private property, system of free
      proprietorship where market system is used. Resources are divided according
      to the laws of money-commodity relations, economy is connected with high
      risk and liability is undertaken by the subjects of market.
   - Mixed economy is characterized by a combination of private and state
      sectors, where a state interferes with economy through its economic functions,
      but with the account of self-regulating role of the market.
   c) Civilizational and formational approaches are distinguished in defining of
   society types. K. Marx, the author of formational approach, noted three main
   - primary or archaic, to which he referred primeval or Asian way of production;
   - secondary, comprising slave, feudal and capitalist ways of production;
   - communist, including socialism and communism.
   Civilizational approach is a conception of the division of history of society into
   periods; it presupposes historical circulation of different types of society and
   epochs through definite stages from birth to death. W. Rostow divided history
   into five stages:
   - traditional society (primitive technique, agriculture, authority of farmers);
   - transitive society (centralized state, proprietorship);
   - the stage of “movement” (industrial revolution and its results);
   - “maturity” stage (science-technical revolution, urbanization);
   - the stage of “mass consumption” (defines the sphere of services and
      production of consumer goods).

             1. Define the subject of economic theory according to the existing
             2. Characterize economic laws and categories.
             3. Functions of economic theory as a scientific discipline.
             4. Characterize the economy of Ukraine.

                                         LECTURE 2.
                            Commodity form of production organization.

              1.   Production, its main factors, means of production and society
              2.   Subsistence and commodity economy.
              3.   Goods and their properties. Laws of commodity output
              4.   Money, its functions. Law of money circulation, inflation.

1. Production, its main factors, means of production and society needs.
1) Production as a source of life. Food, clothes, footwear dwellings etc. are essential
for human life. To adapt natural resources to the satisfaction of needs people must
work. That’s why, the basis of life and society development is production.
2) Production is a process of human influence on objects (substances) with the use of
natural forces and their adaptation to satisfaction of definite needs.
3) Relations of production. Any production is of social character, as people never
work aloof from each other, they are connected in production activity. It means, that
people get in contact not only with nature but with others whilst production. These
relationships are called economic ones.
4) According to the neoclassic theory main factors of production are labour, land,
capital and entrepreneurial abilities.
a) Labour is a conscious, purposeful human activity, in the process of which people
    change outer nature, regulate exchange of goods and change their surrounding. In
    the course of the process people achieve their aim that defines the way and a
    character of actions and to which they subordinate. This is the fact that distinguishes
    labour from instinct actions.
        - Objects of labour are natural resources, influenced and transformed by
           people in the process of labour. They can be of two types: 1) given by nature;
           2) the ones that are to be transformed – raw material.
        - Means (instruments) of labour are instruments, used by people while
           transforming objects of labour.
b) Land is used as means of labour in agriculture, in extracting industry it is an object
    of labour.
c) Capital, existing in a form of money and commodity is an integral part of the
    process f production.

d) A person who joins land, capital and labour, undertakes risk for their use acts as an
   entrepreneur and is a fourth factor of production.

5) Facilities of production and needs of society.
a) To produce the amount of tangible and intangible goods necessary for society, one
    should spend a great deal of different resources (natural, human, financial etc.), that
    are called economic resources.
Economic resources are substances or definite factors of production, used for the
production of goods and services. Resources are different and their classifications are
       - natural, or the deposits of minerals, that society possesses or natural
           conditions of life (favorable for agriculture, favorable geographic location);
       - human – with people’s experience, qualification, level of education and
           entrepreneurial abilities;
       - created and perfected by previous generations for production activity and
           consumption, i.e. real enterprises, transport systems, housing etc.
       - money, currency in gold, financial etc.
b) All types of resources that are at mankind’s disposal, resources of definite countries,
    firms, families are limited in qualitative and in quantitative respect. This is the
    principle of scarcity of resources. Hummel labour is limited by their number and
    their ability to work, by working hours etc.
c) Scarcity of resources provokes scarcity of facilities of production. Facilities of
    production are ensured by means of the best joining of factors of production,
    existing choice up to the alternative one. The problem of choice provokes three main
    questions of the market: “What?”, “How?” and “For who?”. Defining its essence we
    are guided by market conditions, define the aim, choose means of its achievement
    and estimate the outcomes of our activity.
d) The necessity of people to have definite gods and services are called needs. Needs
    are variable, they can also be classified according different criteria:
       - needs in means of existence – goods, satisfying human bare necessities (food,
           clothes, dwellings etc.);
       - needs in social and cultural means of life – education, leisure etc.;
       - needs in means of activity – objects for production of goods and services;
       - needs in satisfaction of social-prestigious goods – tourist services, luxuries
e) An increase and a constant change of needs (their structure, quality and quantity) is
observed alongside the development of society. During every ten years the quantity of
types of goods and services enlargers more than twice at a simultaneous increase of the
quantity of consumption of goods. Needs are increasing in quantitative and even more
in qualitative respect. This is expressed in the law of the increase of needs.
The increase of needs and their change provoke a stimulus to the production of goods
aimed at satisfaction of human needs.
       - Economic interest is a deliberate necessity of the participants of market
           relationships, a moving force of their actions in the sphere of production and
           distribution of goods and services.
       - Bearers of economic interests – individuals and legal entities.
e) Conflicts of interests can appear in different forms. The reasons of such conflicts are
   different level of the forces of production, system of economic relations, differences
   in the forms of property, social and economic heterogeneity of different forms of
   labour, breakage of objective economic laws, voluntarism etc.

2. Subsistence and commodity economy.
1) Forms of organization of production and their differences.
The history of economics gives two major forms of social production organization:
subsistence and commodity ones. They are different in following aspects:
      - development or backwardness of social labour division;
      - openness or closeness of economy;
      - economic form of produced forms;
      - types of economic connections between production and consumption of

2) Historical stages of formation of economic organization of production.
a) Historically, subsistence economy became the first type of economic organization of
production. Subsistence economy is the system of organizational-economic relations
where people produce goods to satisfy personal needs without exchange on the market.
The system is characterized by:
       - manual labour;
       - closed economy;
       - direct economic connections between producers and consumers;
       - social form of wealth is a product of definite value.
b) More complex form of economy, compared to subsistence one, is commodity
economy. Commodity economy is the system of economic relations where valuable
products are manufactured to be sold on the market. A condition, necessary for the
appearance of commodity output is social labour division Social labour division is
producers’ specialization on the manufacture of definite types of goods or definite
c) Specific features of commodity economy:
       - labour division;
       - open character of economy;
       - mediated economic connections (production – exchange – consumption).
d) Stages of commodity economy:
       - simple – production of farmers, craftsmen who don’t use hired labour;
       - capitalist – great machine production with the use of hired labour and profit

3. Goods ant their properties. Laws of commodity output development.
Goods are considered to be a social form of wealth at production. Goods are the
products of labour, manufactured for satisfaction of social needs and they become
consumed through the exchange. Goods possess two properties:
        - consumer value (an ability to satisfy any human need);
        - cost (an ability to be exchanged into other goods).
Exchange value is a quantitative ratio in which goods are exchanged ones into another
Properties of goods are caused by the character of labour. Labour, put into goods, is
characterized by its dual manifestation:
a) concrete labour – labour, that differs in aims, character of operations, means of
   labour and its results. It creates consumer value;
b) abstract labour – general labour, social character of which is expressed through
   exchange. It creates cost of goods.
K. Marx defined the cost of goods to be socially necessary working hours, spent on the
production of an item under socially normal conditions of production: average level of
abilities and work intensification.

4. Money, its functions. Law of money circulation.
Money – goods of special type, that function as a general equivalent, i.e. it possesses
ability to express the coast of all other goods.
Economic role of money is expressed in its functions. Classical political economy
defines five functions:
       1) a measure of cost – an ability to measure the cost of other goods;
       2) means of exchange – an ability to act as an intermediary while exchange of
           goods and services;
       3) means of payment – an ability to act as legal tender;
       4) store of value;
       5) world money (an ability to participate in exchange between countries).
Modern economics concentrates on three fundamental functions: a measure of cost,
means of exchange and means of payment. A constant movement of money, that fulfills
the functions of means of exchange and means of payment creates circulation of money.
A form of organization of money circulation, established by state in every country is
called financial system. In the history of mankind the three major systems of money
circulation are distinguished:
       1) bimetallism - money was used in a form of gold and silver (XVI-XIX);
       2) monometallism - money was used in a form of gold, paper money and credit
           one were only exchanged into gold (XX);
       3) credit and monetary circulation – the use of a substitute of gold only – paper
           money (banknotes) – from the beginning of XX.
       On the basis of specific nature of money and the functions it fulfills, the laws of
       circulation of money come into force.
Under the conditions of gold circulation and at a free exchange of banknotes and credit
money into gold, the quantity of money, necessary for the circulation can be defined by
means of the formula:

                                    M= (D-C+P-MP)
M – quantity of money, necessary for the circulation;
D – the sum of prices of goods to be distributed;
C – the sum of prices of goods, sold in credit;
P – payments to be settled;
MP – mutually paid payments;
N – the number of circulations of the same units of money.
Many of Western economists use balance of exchange (by Fisher, neoclassic approach):

      M*V=P*Q where

      M – monetary mass;
      V – velocity of money circulation;
      P – level of commodity prices;
      Q – quantity of goods in circulation.

The breach of this balance leads to inflation. Inflation is the depreciation of money,
caused by its excess quantity in circulation of money. It is expressed in the increase of
prices for goods. There are following types of inflation:
       1) According to the character of inflation process:
       - open – unlimited, free and durable increase of prices;
       - repressed – a state control over prices under conditions of commodity deficit;
       - inflation shock – sudden sharp increase of prices.
       2) According to the place of spread:
       - local – within one country;
       - world – embraces a group of countries or global economy.
       3) According to the tempo of the increase of prices:
       - creeping (10% price increase a year);
       - galloping (20-200% price increase a year);
       - hyperinflation (500-1000% price increase a year);
Law of value is the law, according to which production and exchange of goods are
realized according to socially necessary costs of labour. It expresses an objective
necessity of defining market value of goods by working class. Price is a monetary
expression of value. The law regulates the development of commodity output, ensuring
progress of production and economic relations. It fulfills three functions:
              1) regulates the proportions of production;
              2) stimulates the increase of labour efficiency;
              3) promotes social and economic differentiation of employees.

                  Chapter II. Fundamentals of market economy.
            Lecture 3. Essence and peculiar features of market economy

              1. Market as an economic category.
              2. Essence of market economy.
              3. Competition and models of market.
              4. Market infrastructure.

1. Market as an economic category.
1) Definition of market.
a) Market should be considered as a complex category that includes the sphere of
   circulation, where the exchange of goods and services takes place and the system of
   money-commodity relations, formed in the process of exchange of goods and
   services at the existing system of production relations.
Market is a system of economic relations between people who are involved in the
processes of production, allocation, exchange and consumption.
In a broader sense market is a set of social institutions within which a great number of
specific types of exchanges take place, when these institutions assist these transactions,
adding them some structure.

2) Functions of market.
The essence of market is revealed in the functions it fulfills. The most important ones
a) Self-regulation of production, which presupposes the sequence of production and
   consumption in the assortment structure as well as the maintenance of demand and
   supply equilibrium with respect to volume and price;
b) Stimulating function consisting in making the producers manufacture new
   production with the lowest costs per item and maximum profit.

3) Subjects and objects of market relations.
a) Objects of market are means of production, objects of consumption, technologies,
   scientific discoveries and ideas, different services, natural resources, elements of
   national wealth, securities, shares and bonds.
b) If evolution of market is considered from the point of view of the subjects of market
   relations, it is possible to see that initially these were producers and consumers of
   output. Then, in the course of development and trade and money circulation division
   into separate branches, commercial and financial middlemen became active
   participants of market relations.
c) The functioning of market economy presupposes the availability of its separate
   elements, which make up market system. Producers and consumers are the first and
   the most important element of market economy. They are formed in the process of
   social labour division, when the first ones produce goods and the latter consume
d) The major subjects of market relations are:
       - households – economic units which consist of one or more individuals,
          supplying resources and using the money earned for buying goods and
          services with the aim of the satisfaction of their necessities;

      - a firm or an enterprise – an economic unit that uses factors of production and
          manufactures goods for the satisfaction of consumers’ necessities and strives
          to maximize its profit;
      - a state – an independent subject of market including governmental institutions
          which execute economic, political and judicial power for the provision of
          economic conditions for all subjects of economy.
e) Major subjects of economic activity are in close interaction and participate in a
   constant circulation of resources, goods and services.
4) Conditions of market relations formation and development.
For the effective functioning of civilized market the following conditions are necessary:
      - real pluralism of types and forms of property and economy;
      - development of antimonopoly legislation and the availability of mechanisms
          for its realization weaken monopolistic tendencies in economy and promote
          an effective functioning of modern market;
      - a well-developed system of economic and administrative regulation of
          economy by state (by economic methods mainly) create preconditions for the
          existence of the regulated market;
      - reliability and availability of information about market, developed marketing
      - competition between the subjects of entrepreneurial activity, the number of
          which must make up more than 7-8 in the production of homogeneous goods,
          as 1-2 subjects constitute monopoly, and 3-5 – oligopoly;
      - developed and diversified complex of subjects of property that may become
          the objects of buying or selling ;
      - availability of market infrastructure, i.e. the complex of institutions,
          enterprises and organizations providing the service of market, buying or
          selling of different objects of property etc.

5) Market mechanism and its elements.
a) Market mechanism is the mechanism of interrelation and interaction of major
   elements of market: supply, demand and price. Prices for goods and services are
   defined by demand and supply.
b) Market equilibrium means that under the conditions of market economy
   competition promotes the synchronization of the demanded and supplied prices, that
   leads to the balance between demand and supply.
      - Law of demand is a quantity of goods and services, existing on the market,
          which a buyer wishes to purchase at a definite price regardless of him acting
          reasonably or under the influence of the environment.
      - Law of supply is a quantity of the goods which producers wish and are able
          to sell on the market at the given price.
      - Equilibrium price is a price, which puts the function of demand and supply
          into balance as a result of competition.

6) Types of markets.

a) Market can be divided into groups according to definite signs: organizational,
   functional and spacious.
b) Market structure is inner organization, location and order of definite elements of
   market, their specific gravity in the total market volume.
c) All markets totality, divided into separate elements on the basis of different criteria,
   makes up the system of market.
d) According to the objects of market the following types are distinguished:
      - commodity and service market. It includes consumer goods, foodstuffs,
         household and transport services, education and health care services;
      - factors of production market:
      a) labour market;
      b) means of production market;
      c) raw materials market.
      - financial market which includes:
      a) stock exchange;
      b) currency market;
      c) futures or spot market.
      - In spacious respect the greatest market – the world market – is distinguished.
         It presupposes any goods exchanging processes between countries, concerning
         selling or buying goods and services independently from the agents of trade
e) According to the objects, seller’s and buyer’s markets are distinguished.

2. The essence of market economy.
1) Economic essence of market economy.
a) Market economy is a generalized form of economy organization, based on
    commodity production that ensures the interaction between production and
b) Conditions of market economy appearance and functioning:
      - the first and necessary condition of market economy is connected with the
         social labour division;
      - necessary economic isolation of goods manufacturers as different proprietors
         is also of great importance.
c) Definition of market economy.
Market economy is the economy of free proprietorship. It creates quite free,
independent space for economic activity.

2) Principles of market economy:
               - The principle of free economic activity – the right of any economic
                  subject to choose a desirable, purposeful and profitable type of
                  economic activity and conduct this activity in any form which is in
                  compliance with the state law.
               - The principle of all generality – economy can be considered market
                  one on condition that money-commodity relations penetrate into all
                  spheres of economy.
              - The principle of free market pricing – a price is not limited with
                  outer restrictions, it is defined by mutual agreement between a seller
                  and a buyer as a result of demand and supply interaction.
              - The principle of self-provision – market economy is characterized
                  by self-regulation; self-financing is a part of the principle of economic
                  subject self-provision with all necessary resources.
Modern market economy is characterized by measures of social defence of population
from unfavourable or wrong outcomes (salary and tax restrictions, the existence of the
network of social compensators, subsidies, benefits or free goods etc).
3. Competition and models of market.
1) Competition as an economic category.
a) Competition is a typical for commodity production struggle between producers for
   the most beneficial conditions of production and sales of goods and for the greater
   profit. The essence of competition is vividly revealed in its positive and negative
b) Positive and negative features of competition.
Positive characteristics:
              - competition is an important moving force of economic system
                  development; it assist science-technical progress of society;
              - competition stimulates the decrease of production costs by
                  economizing of resources, the increase of labour productivity,
                  improvement of labour discipline;
              - it makes producers improve the quality of goods, its assortment and
                  customer care;
              - it stimulates cash flow between branches as a result of the maximum
                  profit chase, thus activating the implementation of economic reforms
                  in economy;
Negative characteristics:
              - it strengthens the process of production concentration which leads to
                  the appearance of monopolies;
              - as a result of the struggle for sales markets producers expand their
                  production, manufacture an excessive number of goods that leads to
                  the crisis of re-production;
              - it strengthens the struggle between capitalists for the reduction of
                  expenditures on production by decreasing of salaries that in its turn
                  reduces solvent demand of population;
              - competition provokes employees’ intense labour that results in
                  increase of unemployment which negatively influences workers’
                  standard of living;
              - the use of unfair methods of competition by large-scale companies
                  leads to the destruction of small and middle-sized enterprises, their
                  mass bankruptcy;
              - international competition, from the side of multinational corporations
                  is done by way of bribery and prevents national producers in other
2) Forms and methods of competition.
a) Competition can be intrabranch and interbranch:
               - Intrasectoral competition is a struggle between producers who are
                   involved in one sphere of economy. It results in leveling of individual
                   costs according to social or market cost which is the basis of market
               - Intersectoral competition is a struggle between firms and enterprises
                   of different branches for maximum profit. The object of interbranch
                   competition is a surplus product obtained as a result of re-allocation
                   according to the cash flow from one branch to another.
b) There are price, non-price and non-economic types of competition:
               - Price competition is a price manipulation in different markets, price
                   decrease without any change of quality of goods, price discounts and
                   discrimination in prices.
               - Non-price competition is competition by means of quality
                   improvement, perfection of guarantee service and better organization
                   of sales.
               - Non-economic competition means the use of secret agreements
                   concerning sales market division, takeover of enterprises and
                   industrial espionage etc.
c) Methods of competition - first of all it is the improvement of quality of goods and
   services, fast renewal of assortment, design, guarantee giving, timely price reduction

3) Models of markets.
a) Perfect competition market model, its characteristics.
Definition: Perfect competition is competition characterized by a great number of
producers-competitors and buyers-competitors and by a free access of producers to any
type of activity. Its peculiar features are:
       - availability of many enterprises, producing homogeneous goods;
       - a small size of a producing enterprise in the respect of the market;
       - free access to the market;
       - buyers and producers’ adaptation to the existing prices and their being as price
b) Imperfect competition market model, its characteristics.
Competition at which at least one of the signs of perfect competition is violated is
called imperfect competition.
Definition: Imperfect competition is competition between large-scale, small and
middle-sized companies. It is a struggle for the monopolization of sales markets,
sources of raw materials, energy, state contracts obtaining, intellectual property
possession etc. Its peculiar features are:
       - the establishment of monopoly high prices;
       - acquiring monopoly high profits on the basis of high prices.
c) Submodels of imperfect competition market.
It includes 3 market submodels: monopoly, oligopoly and monopolistic competition.
      - An extreme case is a pure monopoly when only one enterprise dominates in
        some branch. The defining moment at this is not a size of the enterprise, but
        its share of production and sales on the market. Being the only seller,
        monopoly suggests a unique production which doesn’t have any substitute.
        Monopoly is protected from indirect by high entrance barriers to the branch. It
        can be connected with the economy of scale, with natural monopoly when an
        enterprise (in the sphere of hydro- or gas provision) gets privileges from
        government. Monopoly defines prices.
      - Market structure in which a small number of sellers occupy a major position
        in some branch, and the entrance to the branch of new producers is limited by
        high barriers is called oligopoly. The characteristic feature of oligopoly is
        oligopoly connection: every enterprise-producer should take into account not
        only the interests of consumers but also the ones of other firms-producers of
        the market. The is the so called leadership in price determining, i.e. a secret
        agreement on prices. Oligopoly pricing is often done on the principle
        “expenditures plus”, when some definite per cent is added to average
        expenditures while price defining.
      - On the market of monopolistic competition a great number of producers are
        engaged in production and distribution of goods. Every enterprise is relatively
        small in volume of production and sales. An important characteristic of
        monopolistic competition is product differentiation both real and false one,
        that is done by means of advertising, the use of trade marks etc. As the
        production of every enterprise is unique in the eyes of consumers, such market
        tends to acquire the traits of monopoly.

4) Antimonopoly policy of a state.
Different forms of imperfect competition influence market prices in different ways.
Maximum high degree of the influence that damages society is characteristic of
monopoly and oligopoly. They don’t strive to minimize their expenditures in case of the
absence of competition threat. Buyers, compensating for the expenditures by monopoly
high prices, spend a part of their income in favour of monopoly. To support high prices,
a monopolist is not interested in production expansion and in manufacture of additional
products. In this case not only buyers suffer, but economic resources are not wisely
used. All these creates conditions for the implementation of anti-monopoly policy by a
state by elaboration of anti-monopoly legislation.
According to the laws of Ukraine on the monopolism restriction, all the entrepreneurs
whose actions are directed at the establishment of discriminating prices for goods are to
pay penalties.

4. Market infrastructure.
1) Meaning of market infrastructure for economic relations.
a) The formation of market infrastructure is necessary for any model of economy. For
   countries with transitive economy it is of great importance. I command economy
   separate branches of infrastructure were of secondary importance while others were
   not considered to be important at all.
b) The creation of infrastructure institutions ensures normal implementation of
   economic reforms, their absence or badly developed nature makes the reforms fail.

2) Functions of infrastructure:
      - providing (traditional);
      - regulating.
a) Providing function allows to realize the connection between the elements of market
   system, all its subjects and objects. This function fulfilled, a passive character
   dominates in infrastructure.
b) Regulating function subordinates the interaction of market system elements,
   possessing a n active character.

3). Definition of the category of market infrastructure.
Market infrastructure is a totality of branches and institutions, which ensure regular
multi-level functioning of economic subjects and money-commodity movement.

4) Major elements of modern market infrastructure are:
      - credit system, including banks;
      - exchanges (commodity, stock exchange, currency and real estate market);
      - auctions, fairs and other forms of organized outer-exchange mediation
         (brokers, dealers);
      - the system of regulation of population employment (state and private
         structures), labour markets;
      - issuing system;
      - depository system (national depository, independent owners and securities
      - consulting agencies;
      - clearing banks or firms;
      - trust companies;
      - innovative-informational centers, technoparks;
      - advertising business;
      - means of business communication;
      - rating agencies;
      - real estate business;
      - auditing companies;
      - civil firms and sponsor funds meant for the support of entrepreneurial activity.

                                   Questions for self-control.
              1.   Define market as an economic category.
              2.   Characterize main principles of market economy functioning.
              3.   Name the most important positive features of competition.
              4.   What are the most important negative features of competition?
              5.   What is the essence of free competition?

               6. What are the major forms of monopolies in the sphere of direct
               7. What are the main anti-monopoly measures taken by a state?
               8. Characterize market infrastructure.
               9. Define the main elements of market infrastructure.

                   Chapter 3. Subjects of regulated market economy
            Lecture 4. Fundamentals of entrepreneurial activity and its forms

      1.   Enterprise as a subject of economic system.
      2.   Capital as a category of economic theory.
      3.   Capital of an enterprise, its circulation. Functional forms of capital.
      4.   Profits and expenditures of an enterprise.
      5.   Labour relations under market conditions.
      6.   Proprietorship in the agrarian sphere.

1. Enterprise as a subject of economic system. Forms and types of enterprises.
1) Enterprise as an economic category.
a) Entrepreneurial activity as the basis of market economy.
Market economy is characterized by entrepreneurial activity. Market relations
presuppose the participation of at least two parties in them (contractors). Proprietors,
investors, land owners, i.e. individuals and legal entities who possess some property and
conditions for its successful realization are referred to contractors.
b) Proprietorship is an initiative activity, directed at the achievement of commercial
   success, profit earning and connected with some risk of personal capital investing. In
   many cases a proprietor becomes an owner of means of production or an enterprise,
   however an authorized manager, taking decisions on behalf of an owner can’t be a

2) Types and forms of enterprises.
a) Types of enterprises.
An enterprise (a firm) is a basic structural unit of entrepreneurial activity within social
production. It exists on the basis of different forms of property: private, state, public,
foreign or cooperative.
- On the basis of the forms of property in Ukraine there are:
= sole-proprietorship, based on a personal property of an individual or his labour;
= family enterprise, based on labour property of citizens, members of one family who
live together;
= private enterprise, based on the property of an individual who has a right to hire
= collective enterprise, based on the property of labour collective, cooperative, civil or
religious organization;
= state enterprise, based on generally republican property;
= state communal enterprise, based on the property of administrative unit;
= common enterprise, based on the joining of different owners (mixed firm), even
foreign ones, according to national legislation;
= foreign enterprises, based on the property of other states or foreign individuals or
       - Depending on the volume of goods and services produced enterprises are also
           divided into:
       = small (from 1 to 50 individuals involved);
       = midsize (from 51 to 500 individuals involved);
       = large-scale (more than 500 individuals involved).
b) Forms of proprietorship.
       - Households, based on the agreement between individuals and legal entities
           and created to get profit according to the law of Ukraine “On households”
           dated 1991 are distinguished among the enterprises. Here are included:
       = joint stock companies, private and public ones;
       = limited companies;
       = companies with additional liability;
       = over-all companies;
       = command companies.
       - One of the wide-spread organizational forms of enterprise in conditions of
           economy of transitive type is a rent company, established for a definite period
           of time under definite terms.
c) Moral aspect of proprietorship.
In the course of the whole history of entrepreneurial activity, it possessed a moral
aspect with its principles and rules. The laws of successful activity on the market were
based on care concerning personal well-being and prosperity. Spiritual values were of
secondary importance, though they were a norm in entrepreneurial environment.
A modern entrepreneur possesses positive features that provoke a wish to inherit and
make a progress. Though it’s not worth to idolize the portrait of a proprietor in
conditions of changing economic world.
d) Functions of proprietorship.
-Major features of an entrepreneur:
= market analysis;
= innovation;
= orientation to innovations;
= a constant search of new market possibilities;
= rational use of the possibilities.
-    Such an approach to proprietorship is realized by means of the fulfillment of the
following functions:
       = resource;
       = organizational;
       = creative.
4) Principles of proprietorship.
a) Major principles of entrepreneurial activity are:
       - free choice of types, forms and directions of entrepreneurial activity;
      - self-formation of the programmes of activity, the choice of partners and
      - free pricing;
      - allocation of the profit obtained after tax paying and settlement of debts;
      - self-realization of foreign commercial activity and the use of currency revenue
          in accordance with state laws;
      - free recruitment;
b) Common features and differences between the categories of ‘business” and
      - Proprietorship is an activity, connected with innovation, increased venture risk
          and new quality of manufactured goods.
      - “Business” traditionally means reproductive activity, i.e. production of goods
          and services using existing technologies mainly.

2. Capital as a category of economic theory.
1) Differences between money and capital.
a) In every day life any money is often called capital. In scientific economic meaning
    there is an essential difference between capital and money.
- If some goods are sold in order to buy others the form of turnover looks like this:
G-M-G. Here money serves the exchange of goods and functions as means of
- Money becomes capital when it is put into circulation to get the sum bigger than
initially invested. The formula of capital movement goes like this: M-G-M’, where
M’=M+^M, ^M is money increase over the initial sum.
b) Meaning of the category “capital”.
        - Capital as any economic category has its meaning and a social form. The
           essence of the category is revealed in their dialectic integrity.
        - Capital is not only means of production, goods or money, but relations of
           production at which tools of labour, definite material benefits, exchange value
           become the instrument of taking a part of somebody’s unpaid labour.
        - According to K. Marx capital is not a thing, but a social, belonging to a
           definite social-historical formation relation of production, which is expressed
           in a thing and gives it a specific social character.

2) Alternative capital theories.
a) Different economic schools give different explanation of capital. But three following
    directions are major:
       - materialistic or naturalistic conception;
       - monetary conception;
       - theory of “human capital”.
b) According to monetary theory, capital is money that brings interest, capital is
financial resources.
c) Theory of “human capital”. From the point of view of this theory the two sectors
interact in production: “physical capital”, in which means of production are included
and “human capital”, to which knowledge, skills and energy are referred.
3) Structure of capital.
a) Advanced capital is divided into two parts (according to the form of participation of
new value creation):
       - constant capital – the capital which turns into means of production and in the
          course of labour doesn’t change its size (C);
       - various (variable) capital – capital which turns into labour force and in the
          process of production changes the size of its cost, i.e. creates surplus value
b) Industrial capital is equal to C+V+m,
where C- constant capital;
        V – variable capital
        M – additional value created by labour force.

3. Capital of an enterprise, its circulation. Functional forms of capital.
1). Circulation of capital.
a) Circulation of capital is a movement of value of factors of production through the
    spheres of production and circulation, as a result of which it passes three stages and
    gets three functional forms: monetary, production and commodity.
b) Functional forms of capital.
       - monetary – fulfills the function of creation the conditions for production;
       - production – fulfills the function of goods creation, value and surplus value
       - commodity – the function of distribution of goods, value and surplus value
           and creation the opportunities for continuation of production process.
c) Formula of capital circulation:
M-G            MP      …P…        G’-M’

1st stage            2nd stage    3rd stage

where M – money
      G – goods
      WF – workforce
      MP – means of production
      P – production
      ‘ – initial value increase by the size of surplus value.

2) Capital circulation.
a) The circulation of industrial capital considered as a non-stop renewing process forms
   its circulation.
b) Real and general capital circulation.
       - Real capital circulation – means the return of capital both by value and in a
           natural form;

      - General capital circulation - a circulation calculated as an average size from
         the circulation of its components.
c) Capital circulation is measured by time and velocity.
-Time of circulation – a period during which the resources that passed the spheres of
production and circulation return to the initial (monetary) form. The time is divided into
production time and circulation time.
= Production time – a working period, natural idling time and reserves storage time.
= Circulation time – time of purchasing and distribution of goods.
      - Velocity of circulation is measured by the number of circulation of resources
         that are made during a year. The number of circulation is calculated
         according to the formula:
      N= -----
      Where n – number of circulations
             O – unit of time accepted (a year)
             T – the time of the resources circulation.

3) Capital division according to the character of circulation.
In accordance with the way of transfer of means of production value over the value of
manufactured goods in production form capital is divided into fixed and working one.
a) Fixed capital is a part of productive capital, the value of which is transferred over
   the product in parts during some periods of production (premises, equipment etc.).
b) Working capital is a part of productive capital the value of which is transferred
   over the product created during one circulation and is completely restored after its
   distribution (raw materials, workforce etc.).

4) Reproduction and accumulation of capital.
Capital as a self-increasing value is realized in the process of expanded reproduction the
material base of which is accumulation.
a) Capital accumulation – growth of monetary and material means necessary for the
   expansion of reproduction; the source of accumulation is surplus value.
   Accumulation, thus, is a capitalization of surplus value.

b) Major forms of capital accumulation:
     - concentration of capital – increase of individual capitals by turning a part of
        surplus value into capital, i.e. capital increase at the expense of profit increase;
     - centralization of capital – capital increase by voluntary or compulsory joining,
        merge of individual capital of two or more entrepreneurs or by takeover of
        some capital.

5) Means of capital division.

Division according to the          Parts of capital        Division according to the
   fulfilled role while                                     character of operation
Constant capital            Premises,    equipment, Fixed capital
                            machines, raw materials,
                            fuel,     supplementary
Changeable capital          Employees’ wages         Working capital

4. Expenditures and profit of an enterprise.
1) Expenses of production as an economic category.
a) The category of “expenses of production” is referred to general economic ones
   which reflect realities of some social-economic formations.
b) Expenses of society and expenses of an enterprise are distinguished while
   production of goods.
      - Expenses of society form value of goods which includes the fund of costs
         compensation, necessary and surplus product.
      - Expenses of an enterprise are payments needed for the acquiring and
         preserving of definite number of resources (capital, raw materials, workforce).
      They are divided into inner and outer.
      - Outer expenses – payment for resources to suppliers who are not owners of
         the enterprise.
      - Inner expenses – expenditures on their own resources which are used (land

c) Expenditures are also divided into constant and changeable ones, according to the
   relations of value.
       - Constant ones – their size doesn’t change depending on the changes of
          volumes of production.
       - Changeable – their size depends on the volume of production (spendings on
          raw materials, fuel, energy, transportation costs).
d) The law of decreasing profitability and costs of an enterprise.
Production costs of goods depend on prices for necessary resources as well as on
technology, i.e. on the amount of resources necessary for production. In connection
with this it’s important to know how the volume of production changes while further
great number of variable resources will be added to the fixed ones. This idea is
described by the law of decreasing profitability.
e) Expenses of production expenses in cost of output.
       - Expenses of production are cost of production, which is the totality of current
          expenditures of an enterprise on production and distribution, expressed in a
          monetary form. They are divided into direct and indirect.
       = Direct expenses are the expenses on major materials, spare parts, employees’
       wages, social insurance.
       = Indirect ones are the expenses which can’t be referred directly to output.
Costs, according to their economic direction are:
       - spendings on raw materials, fuel etc.;
       - amortization of major funds;
      - wages and social insurance;
      - other spendings (business trips, post and delivery cervices etc.)

2) Economic essence of profit, its types.
a) Economic meaning of profit.
       - The simplest definition of profit – it is a converted form of surplus value. It is
          a difference between the price of selling of goods and capital costs for their
       - Profit is created not only by employees’ labour in the sphere of material
          production. Managers of different levels, scientific workers etc are also taken
          into account.
b) Forms of profit existence:
       - Medium profit – is obtained by small and midsize capitalist enterprises.
       - Monopoly profit – is obtained by monopolies, group ones or oligopolies,
          transnational corporations etc.
c) Structure of profit.
Modern economic schools differentiate normal, economic and accounting profit.
       - Normal – the profit retained at an entrepreneur’s hands after payment of taxes,
          credit interests, rent, penalties etc. It is a net profit, a part of which is
          capitalized and used for expansion of reserve funds.
       - Economic - general revenue, excluding all expenses.
       - Accounting profit - general revenue, excluding outer expenses.

5. Labour relations in market conditions.
1) Essence of labour relations.
Labour relations are the ones which exist between employees and owners of capitalistic
enterprises, thus being the process of technical-economic and social economic
recruitment of workers with means of production.

2) Subjects of labour relations: employee, employer and state.
a) An employee possesses specific goods – labour force. Like any goods, labour force
   has two properties: value and consumer value.
       - Value of labour force is defined by the value of life necessities and services
          necessary for its complete reproduction.
       - Consumer value of workforce is an ability to create greater value than its own
          value, i.e. surplus value
b) Employer is a subject of labour relations who is capable of labour isolating from an
employee and appropriate the product of his activity on the basis of labour agreement.
Employers create workplaces, define the volume and structure of demand for workforce
and attract it to social production with the help of the mechanisms of labour markets.
c) State.
A state as a subject of social-labour relations is a legislator, a defender of organizations,
employers and citizens’ rights, a middleman and arbiter in labour conflicts.

3) Salary. The system of salary.
a) The essence of salary.
      - An employee gets pay for his labour. It is a converted form of value and a
         price of such commodity as labour force. The transformation is in pay being a
         form of payment for labour, though really it is a form of payment for labour
      - If pay had equaled the value of a complete product of labour, an owner of
         means of production wouldn’t have obtained profit. As an investor and
         organizer of production he has a right to appropriate surplus value.
b) Nominal and real wages.
      - Nominal wages are the sum of money, obtained by an employee for his
      - Real wages are measured by the mass of goods and services that are possible
         to buy for the obtained money. It directly depends on nominal wages and
         indirectly – on the prices for goods and services.
c) Forms of wages.
      - Time rates – is defined by the continuity of labour. Payment by the hour is its
      - Piece rates – is defined by the quantity of manufactured goods. Its size is fixed
         by multiplying the cost of an item by the quantity of items.
d) The system of wages.
Forms of wages, supplemented by different benefits turn into systems of wages:
      - simple time rates, time rates with bonuses;
      - simple piece rates;
      - piece rates with bonuses etc.
4) Employment and unemployment under the conditions of market economy.
a) Employment is a number of grown-ups able to work is provided with job.
b) Unemployment is a complex social-economic phenomenon, expressed in misbalance
   between supply and demand of workforce, as a result of which a part of able to work
   people don’t have a constant workplace and makes up a reserve army of labour.
c) Forms of unemployment:
      - according to the origin: technological, structural, conversional, economic;
      - according to the size of a territory: regional; national;
      - according to durability: stagnant; current; frictional;
      - according to the form of expression: disguised; vivid.

                                   Questions for self-control.

              1.   What is the essence of proprietorship?
              2.   What are the types of enterprises?
              3.   What are the conditions for proprietorship to function?
              4.   What are the main alternative theories of capital do you know?
              5.   What is capital circulation?
              6.   What are expenditures of an enterprise?
              7.   What is profit of an enterprise?
           8. What are labour relations under the conditions of market economy?
           9. Characterize the problems of employment and define the main forms
              of unemployment.

                                      Lecture 5
                      Finance, credit and circulation of money.

 1. Necessity and essence of state regulation of economy. Major directions of
 2. Public finance, its functions. System of finance.
 3. State budget. State debt.
 4. Credit-banking system of capitalist relations.
 5. Financing of health protection system.

  1. Necessity and essence of state regulation of economy. Major directions of
      Even “free market” system can’t do without a state. It fulfills the functions, that
  can’t be realized by market:
      - provides economy with the necessary amount of money;
      - regulates the so called “outer” effects;
      - satisfies “collective needs” (necessity in “social goods”).
      Western manuals mention three global functions of a state: effectiveness,
stability, justice. State regulation is conducted through:
1. Legal regulators - legal base of proprietorship is important.
2. Administrative regulators – must be carefully applied.
3. Economic regulators – are the major ones.
  Economic policy of a state is aimed at creation and support the conditions of
stability and balance of economic situation. This approach became known as the
policy of stabilization. It’s typical for the situation of a crisis, decline, when
subordination and balance are to be reached in economy.
   Countries with socially oriented market economy are characterized by
concentration on a social purpose of state economic policy.
  Regulation of economic and social life by government is the totality of definite
actions, directed at the speeding up or stopping, stimulating or blocking of
development of these or those processes in the necessary direction.
  State mechanism represents definite forms of social production organization, the
totality of organizational and economic relationships of the subjects of social
production, forms and methods of their regulation.
  Main directions of the activity of a state are anti-crisis, anti-cyclic and anti-
inflation policy, stimulation of economic growth, rationalization of allocation of the
forces of production, small business support, regulation of employment and
unemployment, export-import control, business environment and price control,
regulation of competition and monopolies.
  2. Public finance, its functions. System of finance.
  Finance is the system of economic relationships that has been formed in society
  while funds formation and use on the basis of national income and GNP value
  Functions of finance – specific way of expression of finance properties.
  Function of division – an active participation in GDP and national income
division between the participants of social production, branches of economy,
regions, material production sphere and social-cultural one.
  Function of control – society control over production, division and circulation of
economic product.
  Financial system – the system of forms and methods of creation, division and
usage of state funds and the funds of subjects of economy.

 3. State budget. State debt.
 State budget is a main part of economy regulation in the system of state finance.
 State budget – the greatest centralized monetary fund which is at government’s
 disposal. It reflects monetary relations, existing in a country between individuals
 and legal entities concerning national income redivision in connection with money
 raising for state financing, realization of social policy, cultural and educational
 development of a nation, defense and society governing.
 The meaning of budget is realized through its functions: division and control.
 Function of division means money concentration at government’s hands and its
 use with the aim of social needs satisfaction.
 Function of control – budget reflects economic processes, taking place in
 branches of economy, through funds raising and use.
 State budget is balanced by means of incomes and expenditures.
 Incomes – economic relationships between a state and enterprises, organizations
 and citizens in the process of budget funds formation.
 Expenditures – economic relationships that appear while state funds division and
 their spending on state needs.
 State debt – a total amount of governmental borrowing from securities owners,
 that equals the sum of past budget deficits. Inner and outer debts are distinguished.
 Fiscal policy, that is also called financial and financial-budget, increases its
 influence on major elements of a state treasury. It’s closely connected with state
 budget, taxes, state monetary incomes and expenditures. Under the conditions of
 market economy it is a pivot part of a state economic policy. Fiscal policy
 combines such important forms of financial policy as budget, tax, expenditures and
 incomes ones.
 Fiscal policy is spread on mobilization, attraction of necessary state funds, their
 division, guaranty of the right application of the funds.
 One of the major tasks of fiscal policy is in finding the sources and means of
 formation of centralized state monetary funds, that would allow to realize the
 purpose of economic policy.

     Budget policy as a part of fiscal policy is oriented mainly on balanced with
   incomes and expenditures budget. The task of a state budget policy is the
   overcoming of budget deficits that reach ultimate level.
     Tax policy – a part of fiscal economic policy that is expressed in the defining of
   types of taxes, taxable objects, tax rates, terms of tax levies.
     Since 1992 Ukraine adopts national budget. One of the conditions of IMF’s giving
   loans is the minimum budget deficit.
   Taxes are obligatory payments from individuals and legal entities’ incomes,
   regulated by laws, necessary for the fulfillment of definite functions by state. Taxes
   are the major source of state incomes.

    4. Credit-banking system of capitalist relations.
    Credit is money lending on conditions of giving it back. It is a form of a loan capital
    Loan capital is a separate form of industrial capital. The historical form of a loan
    capital was usurious one. Loan capital is monetary capital, temporary free money,
    given for a temporary use to subjects who need it on conditions of giving it back.
    The source of a loan capital is a depreciation fund, salary fund, population or
    organizations’ savings fund. Profit, obtained as a result of a loan capital use is
    divided into two parts:
          - Loan interest is something like a price of a loan capital, given to an owner of
             the loan capital as a payment for its use.
          - Entrepreneurial income is another part of profit that becomes the property of
             an operating capitalist. The effectiveness of a loan interest use is defined by
             a loan interest rate.
  Loan interest rate is the ratio of the income, obtained for a loan capital to the amount
  of capital, given as a loan, expressed in per cents. Depending on the functions
  fulfilled, the two types of credits are differentiated: commercial and bank ones.
Commercial credit is given to proprietors who transact while selling goods in the form
of deferral. The major means of payment at a commercial credit is a bill of exchange.
Bill of exchange is an absolute debt liability of a borrower to pay a definite sum of
money at a definite term.
2) Types of credits.
Depending on the fulfilled functions the two types of credits are distinguished:
commercial and bank.
a) Commercial credit is given to enterprises that transact with each other while selling
    of goods in the form of delay in payment.
b) Bank credit is a credit that is given by banks and other financial institutions in the
    form of monetary loan. Unlike commercial credit bank credit is given in great sums
    for different purposes (expansion of production, salaries, purchase of production
3) Realization of credit relations.
a) Realization of credit relations is done with the help of banks.

        - Banks are financial-credit institutions, accumulating free funds, which give
          loans, make some calculations on their clients’ demand, and keep savings of
          population, state and social organizations.
        - In many developed countries banking system is made up of two levels.
          National Bank functions on the first level, different commercial banks and
          insurance non-banking organizations operate on the second level.

b) Banking operations.
Banks function due to the two interrelated transactions: passive and active ones.
         - Passive transactions are the ones connected with the creation of bank
             resources, accumulation of money due to clients’ deposits, mobilization of
             their own resources.
         - Active transactions are operations connected with the allocation of means
             and their use. They include the account of bills of exchange and fund
c) Types of bank profit.
All banks operate on commercial basis, i.e. they are aimed at profit getting.
         - Gross bank revenue is a difference between interests obtained by banks and
             the one paid by banks.
         - Net bank revenue is gross revenue of a bank minus expenditures of a bank.
4) Share capital as a part of credit-banking system.
a) Share capital is a part of real capital in the form of shares, bonds, paper
    representatives of real capital, the value of which increases not in the process of
    direct production but in the course of a special circulation.
b) Shares are securities certifying the investment of some capital by its owner into the
    capital of a stock company and giving the right for getting profit according to the
    size of invested capital.
c) Revenues which agents of economic relations get from shares are called dividends.

                              Questions for self-control.

      1. What’s the essence of state regulation of economic relation?
      2. Characterize finances and their functions.
      3. Characterize the structure of financial system of a state.
      4. What is fiscal policy of a state?
      5. What is budget policy of a state?
      6. What is tax policy of a state?
      7. Characterize credit relations.
      8. What is a banking system made up of?
      9. What is real capital of an enterprise?
      10. What is share capital?

                     Lecture 6. Pricing. Prices under market conditions.

      1.   Price and mechanism of pricing.
      2.   Types of prices, their role and functions in market mechanism.
      3.   Social production, its types.
      4.   Relations of allocation and their place in the process of reproduction.

1. Price and mechanism of pricing.
1) The basis of commodity prices.
According to capitalist commodity output not only socially necessary expenses of
production make up the basis of commodity prices, but the correlation between demand
and supply as well:

Where Pp – a price of production;
        C – constant capital;
        V – variable capital;
        P – profit.
2) Price as a result of interbranch cash flow.
In the process of interbranch cash flow the difference in branch profit rates, which
appears as a result of differences of organic capital structure, is considerably reduced by
deviation of prices from value. An average profit rate is added to the expenses of
production in different branches and calculated according to the formula:


Where p’ – average rate profit.
      C+V – advanced capital.

3) Price under the conditions of capitalistic commodity output.
In a simple commodity production prices are defined by the law of value only, but
under the conditions of capitalist commodity output they are also defined by the law of
surplus value, demand and supply. Thus, price is a monetary expression of the price of
production, the interaction of laws of value, surplus value and the law of demand and

4) Monopoly price of production.
With the appearance of monopolies, group monopolies (oligopolies) pricing process has
become more complex and monopoly high and law prices have been established. As a
result of this a price of production turns into monopoly one which is expressed by
means of the formula:

Where Mpp – monopoly production price,
      C- constant capital,
      V – variable capital,
      P – average profit,
      P’ – monopoly high profit.

2. Types of prices, their function in the market mechanism.
 1. Definition of price.
a) Price – monetary expression of value, quantity of money that is paid for an item or a
b) Structural elements of price.
A price for any product is composed of definite elements. Major of them are cost and
profit. Their availability in a price is obligatory. A price can also include:
         - excise - an indirect tax;
         - VAT;
         - Extra charges of commercial agencies;
         - Trade bonuses and discounts.
c) Functions of a price:
         - accounting-analytical, ensuring the account of results of economy and its
         - stimulating, promoting reasonable use of scarce resources, science-technical
             progress, assortment renewal;
         - allocating, influencing the allocation of resources, revenues, and public
         - regulating, which balances the resources between separate producers and
             demand and supply.

2) Types of prices.
a) Purpose of price optimization.
Depending on the purpose of an enterprise different approaches to pricing are
distinguished. The following reasons can make up the purpose of an enterprise in
        - survival on the market;
        - profit maximization;
        - leadership on the market;
        - leadership in quality of goods.
b) Prices of production.
Prices of production are the prices at which the distribution of goods is done and
services to other enterprises are provided.
- Wholesaling prices are the ones at which state, collective and private enterprises pay
for great consignments of goods.

c) Consumer prices are the prices for goods and services, at which they are sold to
d) Types of prices depending on the ways of their fixing:
        - state;
        - agreed;
        - free;
        - import prices.
e) Factors influencing price level.
A price level is influenced by market structure and by the following factors:
        - state regulation of prices;
        - manufacturers’ competition;
        - demand and supply correlation;
        - purchasing power of money;
        - quantity of goods and services.

3. Social production and its types.
1) Essence of social production.
Social production – is a totality of individual enterprises or firms in their
interconnection and interdependence. Social product is a result of social production.
Social product is a complex category. It includes different tangible and intangible goods
manufactured by different branches of industry. It is a sum of material and spiritual
goods produced by society for a definite period of time, for a year as a rule. It is
calculated in different ways and that’s why we deal with its different forms depending
on the elements of which it is composed.

2) Forms of social product.
a) Gross social product (GSP) – is calculated as a sum of annually produced gross
   product of all branches of material production. Its value includes not only the value
   of ready-made product but the one of the intermediary product which is a ready-
   made product for definite branches.
b) Ultimate social product (USP) – output which serves for personal or production
   consumption and for the renewal of the consumed means of labour.
c) GSP and USP are the indicators of material production, but except for the material
   one, social production also includes some branches of non-material production.
   Thus, USP is a part of GSP and includes double account.
d) The most important indicator of economic development is a net product or national
   product (NP). It is a part of GSP or a newly created for a year value; it is a result of
   human labour, spent during a year. It is a real income, which society can spend on
   personal consumption and on production development. Thus, NP is a difference
   between GSP and the value of the consumed means of production. NP is divided
   into necessary and surplus product.
        - Necessary product (NP) is a part of NP, necessary for normal renewal of
           labour force, i.e. for the support of its ability to work, including training of
           new employees.

        - Surplus product (SP) is a part of NP which is an excess of NP. It appears on
          the definite stage of social development while achieving a definite
          development of forces of production.

4. Relations of allocation and their place in the process of reproduction.
1) Income distribution.
A classical economic system allows to realize the allocation of incomes effectively
between the agents of economic activity. Great incomes are obtained by the producers
who invest more labour in production and whose organization of labour is better. It is
quite right from the economic point of view. But from social point of view market
system is not able to realize the distribution of incomes properly. Under the conditions
of market regulation of economy a deep differentiation of incomes between different
groups will always take place. The differentiation doesn’t necessarily reflect changes in
participation of society members in the process of production that finally leads to the
increase of social inequality.

2) State regulation of income distribution.
Taking into consideration the fact that the final aim of social production functioning is
the creation of conditions for people’s life and the achievement of definite standard of
living and paying attention to the existence of poverty under the conditions of income
differentiation, there appears a necessity in state regulation of income distribution. Such
regulation is expressed in the implementation of social defence policy for definite
groups of population.

3) Social defence of population under conditions of market economy.
Social defence of population is done within budget-fiscal policy. The most important
means of this policy are taxes, budget expenses in the form of subsidies, social
guaranties and social insurance.
Thus, the establishment of a progressive scale of income taxation of subjects of
economy gives a possibility to increase taxes for those who get great incomes. Indirect
taxes (an excise duty mainly) can also play an important role in the increase of incomes
of budget at the expense of the rich. The establishment of increased tax rates for
necessities allows to make incomes of subjects of economy equal.
Social help in the form of benefits can be offered to socially poor groups of people on
the basis of their necessities.
Special non-budget funds allow to realize social insurance of population from risks
connected with the loss of ability to work.
Thus, the necessity of state regulation of incomes is connected with their unequal
allocation between the subjects of economy and by the inability of market mechanism
to provide an efficient reproduction of population.

                              Questions for self-control:
      1. What’s economic essence of a price?
      2. Characterize the mechanism of pricing.
      3. What’s the difference between monopoly and competition price?
      4. What types of prices do you know?
      5. What factors influence the price level?
      6. What’s social production?
      7. What forms of social product do you know?
      8. What are the relations of allocation?
      9. Characterize the role of a state in the relations of allocation.
      10. Social defence of population under the conditions of market economy.

                Chapter 3. Fundamentals of public health economics.
                Lecture 7. Theoretical basis of public health economics

      1.   Public health economics as a science.
      2.   Public health and its place in modern structure of economics.
      3.   Economics and public health management as a branch of social health.
      4.   Economic essence of the category “service” in the system of health care.
      5.   Economic peculiarities of public health services.

1. Public health economics as a science.
1) Public health economics is a branch of science that studies the place of public health
in economy, develops methods of rational use of resources for the provision of health
care of population.

2) The two aspects – professional and economic – can be pointed out in public health.
a) Professional aspect of public health makes up the content of medical activity.
b) Economic aspect is introduced by some form of economy within restricted objective
   frames in which the activity takes place.

3) The influence of market on changes in economic processes taking place in public
        - Market makes public health and every person’s attitude to his health
           commercial. It leads to a change in the paradigm of public health, formation
           of qualitatively new types of economic thinking, styles of practical
           economic behaviour of a subject in this sphere.
        - An abrupt change f the number of paid and semi-paid (medical insurance)
           services of public health, offered to the population takes place.
        - A change of economic status of a medical establishment is observed.
           Medical institutions obtain more vivid traits of enterprises producing
        - The changes of a status of medical institutions lead to the change of a
           character of economic connections which appear in the process of their
        - This provokes the appearance of a great number of forms of property in
          public health which is both the condition and the outcome of market
          relations development.
        - Under the influence of market an economic status of an employee of the
          sphere of medicine changes.

4) Purpose and tasks of public health economics in modern conditions.
a) A general purpose of public health economics and system of public health care is
   studying the economic and organizational relations, which objectively appear
   between people in the process of realization of medical activity.
b) The subject of public health economics is the elaboration of methods of rational use
   of resources to achieve the objective in public health care of population.
c) The mentioned above relations are formed in two directions: organizational-
   economic and social-economic.
        - Organizational-economic relations are defined by the technology of
           therapeutic-preventive process and reflect general features typical for a
           number of medical institutions of this type (policlinics, centers of
           diagnostics etc.).
        - Social-economic relations. With the help of their analysis specific features
           of economic activity of medical institutions, functioning in different
           conditions (state, private, cooperative joint-stock etc.) are revealed.

5) Informational levels of economic relations in the system of health care.
a) Microeconomic level. It comprises the activity of every individual, separate
    participants, links and structures of medical services production. The main
    microeconomic element of public health is a therapeutic-preventive institution,
    which acts as a specific enterprise, producing medical services.
b) Medi-economic level. Economic connections in the sphere of public health are
    researched on the level. The system of public health acts as a super-branch, which is
    composed of the whole range of sub-branches, joined with one functional task – to
    protect and strengthen social and individual health.
c) Macroeconomic level - comprises national economy on the whole, the branches that
    are directly connected to the system of public health care. There are about thirty
    institutions of such type, mainly medical industry, pharmaceutical, machine
    engineering, some branches f textile industry, transport machine building, commerce
d) Megaeconomic level. In modern conditions of integration of many types of
    therapeutic-preventive activity macroeconomic relations are included into the world
    economy and into the sphere of health care market functioning on the international

2. Public health and its place in modern structure of economics.
1) Object of research in public health economics.
Definition: The object of research is economic practice of public health system and
medical activity, which is realized in definite organizational-economic forms.
2) Public health economics as an independent branch of scientific knowledge.
a) History:
A separation of public health economics into an independent branch of scientific
knowledge took place only in the second half of the 20 th century. It was caused by some
         - the 20th century is characterized by a great increase of social-economic
           importance of the sphere of services. Medicine has been formed as a large
           branch of economy;
         - public health care started to be considered as an economically profitable
           branch for investment.
b) Public health as a branch of economy promotes preserving and strengthening of
   physical and psychic health of every person, supports their activity and provides
   medical assistance.

3. Economics and public health management as a branch of social health.
1) Preconditions of public health economics birth:
        - increase of the demand for medical services and the formation of public
           health system on this base;
        - necessity of rational planning and effective use of material, labour and
           financial means of public health;
        - role of public health in the system of social production as a resource
           preserving branch;
        - increase of the economic effect and economic importance of public health
           system in preserving and strengthening on people’s health.

2) The object of research of public health economics – economic relations in the sphere
of public health: relations of production, distribution, exchange and consumption of
medical services.

3) Major tasks of public health economics:
       - to define pole and a place of public health economics in the system of social
       - to calculate the volumes of economic resources of public health and their
           effective use;
       - to study tendencies in the transformation of public health structure and their
           connection to social production;
       - to assess economic effectiveness of new organizational forms of medical
           assistance provision ;
       - to elaborate and estimate effective forms of employees’ payroll in medicine;
       - to train doctors in economics and to form the system of economists training
           in public health.

4) Methods of public health economics.

a) Public health economics as a branch of social health and health care uses the methods
of this discipline. The most important of them are: statistic, balance and experimental.
         - Statistic method allows to estimate qualitative and quantitative connection
            between medical-diagnostic and prophylactic processes.
         - Balance method provides optimal correlation between therapeutic,
            diagnostic and rehabilitation processes.
         - Experimental method allows to elaborate the most effective measures for the
            improvement of people’s health.

b) Public health care influences the development of economy by means of preserving
people’s health (mortality rate decrease, at the age of workability mainly, increase of a
human life continuity.)

5) The most important directions of public health economics development:
       - defining the types and volumes of medical services and their organizational
          and legal provision;
       - economic assessment of the effective use of public health resources;
       - financial provision of the activity of therapeutic-preventive institutions;
       - economic assessment of employees’ professional activity in public health;
       - accumulation and use of economic methods with the account of public
          health peculiarities;
       - elaboration of management and marketing system, including the perfection
          of existing effective forms and new methods propagation.

4. Economic essence of the category “service” in the system of health care.
 1) General medical-economic definition of “service”.
A service – as an economic category reflects the relations in the respect of the use of
consumer labour cost and direct influence of labour on a human being. The peculiarity
of a service is in its being produced on an individual consumer’s demand, a patient
mainly. The process of a service provision is inseparable from its producer (a doctor),
and the consumption of a service coincides with the process of its production.
a) The sphere of services is a totality of branches, sub-branches and types of activity,
    the functional application of which in the system of social production is expressed in
    creation and distribution of the goods, designed for an aggregate consumer, which
    are out of production, manufactured by the material sphere.
b) Health care is the leading branch of the sphere of services production. By its content
    the sphere of services and health care are referred to consumer production:
    consumption of goods, manufactured in the corresponding sphere takes place there.
    Formation of physical and psychic base of activity, labour potential and the
    production of special factor of social life occur in health care.

2) Classification of services in general economics of medicine.
a) Depending on the role of services in the process of constant and logically
   preconditioned production process and according to the character of necessities

   which are satisfied with these r those services, spheres of services can be joined into
   two informational-statistic groups.
       - One of these groups introduces the branches, activity of which is directed at
          the satisfaction of social, cultural and intellectual human necessities. It
          includes education, health care, sports, tourism, social maintenance, culture,
          art etc.
       - The second group comprises transport, communication, trade etc. these
          branches are to assist the reduction of costs of aggregate labour, expansion
          of possibilities for the achievement of greater professional specialization.
b) Another approach allows to divide all services into production and personal use,
   among which material and net services:
       - material services are used by a consumer by means of any tangible object –
          e.g., work of art;
       - net services express their result directly in a human being himself.

3) The structure of medical services sphere.
Public health as a branch of economy is quite variable. Services in the system of public
health are organized according to the structure of modern medicine:
        - therapy, surgery, pediatrics and sanitation; rontgenology, dietetics,
            immunology etc.;
        - clinic, prophylactic, science and research, organizational and managerial
        - stationary, clinic, sanitary-resort and other types of medical assistance;
        - dermatology, histology, microbiology, neurophysiology, psychiatry,
            otolaryngology etc.;
        - other types of specialized assistance.

5. Economic peculiarities of public health services.
Economic peculiarities of public health services can be organized in three large
mutually depending groups.
1) The first group includes the peculiarities of public health services, connected with the
specificity of expression of the result of professional activity of the people involved in
the system of public health services provision.
a) The result of professional activity in public health, as a rule, is expressed in a human
   being himself. Material services are exceptions for public health.
b) A service as a branch result of public health always bears individual character. In
   public health there is no mass or small-scale production. It is not possible to provide
   a service in public health in advance. Only information about the services which can
   be provided to patients is introduced on the market of services.
c) The result of public health possesses a complex structure and can be divided into
   many sub-results. Hence, the re is important to realize that to achieve a true result –
   health – the efforts of doctors of some definite specialization and the ones of general
   practice are necessary.

2) The second group is connected with definite quantitative characteristics of services
a) A service can be provided both in the form of commodity (in this case it acquires the
   characteristic of value) and in non-commodity form.
b) The definition of value of public health services can have several variants, while
   choosing which it is necessary for a doctor to decide a complex clinic and economic
   task. The result of such a task depends on:
        - the form of property of therapeutic-preventive institution;
        - the general patient’s health;
        - a patient’s creditability.
c) The value of public health services is apt to change, increase mainly.

3) The third group of peculiarities is connected with the process of public health
services provision.
a) The availability of a great number of investors who pay the process of services
   provision. Only joining of different investment resources makes the provision of
   services constant and effective.
b) The variability of economic relations, expressed in the course of public health
   services provision and without which modern industrialized system of public health
   is not possible.
c) The availability of an active feedback between a patient and a doctor.

4) Different forms of effectiveness are distinguished in public health system:
      1. Medical effectiveness – a degree of the objectives achievement in the sphere
          of prophylactics, treatment and rehabilitation.
      2. Social effectiveness – an assessment of people’s health improvement.
      3. Economic effectiveness – direct and indirect indicators of public health
          influence and prophylactic measures realization.

                                    Questions for self-control
      1.   Economics and management of public health care as a branch of social health.
      2.   Major tasks of public health economics.
      3.   Methods of public health economics.
      4.   Major directions of public health economics development.
      5.   What is a service? What type of service is public health?
      6.   Name basic economic peculiarities of public health services.
      7.   Analyze modern state of the branch according to the existing types of

                   Lecture 8. Management in the sphere of public health

      1. Major categories of management.
      2. Major principles and functions of management.
1. Major categories of management.
1) Management in the sphere of public health.
a) Management in public health is a science of management, regulation and control of
   financial, labour and material resources by organs and institutions of public health
b) The objective of management is to release society from morbidity, disability and
   mortality at the available resources.
c) The tasks of management in public health is the most effective achievement of the
   objective by means of increase of the quality of therapeutic, prophylactic and
   diagnostic measures as well as rational use of public health resources.
d) The object of management – therapeutic-prophylactic establishment.

2) General and functional management.
a) General management is the management off therapeutic-prophylactic institutions on
   the whole.
b) Functional management is management of definite spheres of activity of medical
   institution and its subdivisions. It refers to management of innovative, financial,
   professional and marketing activity of a therapeutic-prophylactic institution.

3) Essence of management.
a) Management appears when people join for cooperative fulfillment of any activity.
Management is mainly human function, the essence of which is to influence the system
on the whole and its separate elements, processes taking place in it.
b) Management includes two sides:
-Subject of management (managers);
-Object of management (labour, financial and material resources)
c) Three equal system of management function in any therapeutic-prophylactic
          - Strategic level (Senior doctor, director);
          - Tactical level (senior doctor’s deputy and senior nurse);
          - Operative level (heads of departments, subdivisions who don’t have other
              managers in subordination).

 4) Functions of management.
 There are three main functions of management:
 a) The first function includes the research of the situation, collection and analysis of
 b) The second function includes decision making with the account of primary
    calculations or transformation of the information. A managerial decision must be:
         - purposeful;
         - grounded;
         - non-contradictory;
         - legal;
         - effective;
There are two main types of decision making: collective and individual.
c) The third function of management is in the realization of the decision made by
   means of the coordination of efforts and means, connections of production and
   control over its realization. Control may be preliminary, directive, selective and
   following after the fulfillment of work).
        - Control consists of four stages:
        = establishment of the desired result;
        = studying the results;
        = assessment and comparison of the obtained results with the planned ones;
        =processing of the correcting effects;
        - Depending on the peculiarities of the object and alongside the functions of
           the object management on the whole, the functions of separate links of
           management are distinguished:
        = technical functions – management of production;
        = commercial;
        = administrative;
        = financial;
        = insurance;

5) Principles of management, its effectiveness.
a) One of the functions of management is power and responsibility. Power may be
   formal and informal.
b) Effectiveness of management of public health institution is defined by the
   implementation of scientific labour organization, i.e. creation of proper conditions
   for the effective use of working hours by employees.

2. Major principles and functions of management.
1) Management of public health.
In the course of transition to market economy the importance of public health
management increases. In this situation the science about management acts as a
complex science of universal character, which studies the process of different systems
management including social sphere.
a) Major principles of management:
       - scientific character;
       - democracy;
       - efficient account and control.
b) Conditions of management system functioning.
For the functioning of any system of management the following conditions must be
       - the system under management must be able to change its properties and
          transform from one state into another;
       - the system of management must have a real possibility to change the
          condition of an object with the help of managerial decisions. It must have
          the corresponding organs, structure and mechanisms;
        - management must be purposeful;
        - the system must have a possibility to choose different variants of the
          decisions made;
        - any system of management must have real material, intellectual,
          informational and financial resources;
        - any system of management must have information about current state of an
          object of management by means of feedback.

2) Public health management as a main task of society.
Public health management is a complex task of society, in the realization of which
many sectors of economy take part. For the scientifically grounded decision making in
public health care provision medical, social, economic, legal and other information is
necessary. Factors defining the forms and methods of complex system of public health
management are to be taken into consideration:
        - social factors;
        - the level of social-economic development of the country;
        - realization of principles of social justice and accessibility of scientific
           achievements for every citizen of society in public health;
        - the level of scientific provision of public health problems;
        - adaptation of the international experience in medical and social provision of
           Ukrainian population.

3) Medical-social provision of the population in the system of public health
The main problem of medical-social provision of the population is defining of the right
correlation of inner and outer connections of the system of public health.
Complex system of public health consists of structural and functional elements. All the
elements of the system are interconnected. For the normal functioning of the
subsystems of public health it is necessary for the element to have constant exchange of
information. The realization of complex tasks of public health requires systemic
approach in which the functions and responsibilities of all the participants of medical
and social public care are clearly distinguished.

                                Questions for self-control
      1.   Tasks and objectives of public health management.
      2.   Two aspects and three levels of the system of public health management.
      3.   Functions of management.
      4.   Essence of medical and social provision of population in the system of
           management of public health care.

                         Lecture 9. Marketing in public health care

      1. Major categories of marketing.
      2. Marketing research on medical services marketing.
      3. Marketing mechanism of public health services and its major elements.
      4. Functions of public health services market.

      1. Major categories of marketing.
      1) Public health functioning under conditions of market economy requires high
      proficiency and deep knowledge from managers and public health specialists.
      Marketing is a complex and multi-aspect phenomenon. In its classical
      understanding it is an entrepreneurial activity which guides promotion of goods
      and services from producer to consumer.
      A famous specialist in marketing, professor F. Kotler considers marketing to be a
      type of human activity directed at the satisfaction of consumers’ needs by means
      of exchange. In public health marketing is a system of principles, methods and
      measures, which are based on the complex research of demand and a purposeful
      creation of supply of medical services by a producer.

      2) Three groups of subjects act on the market of medical activity:
       - a producer, a seller of medical services and goods (medical organization, am
       - a buyer – a patient (sick or healthy;
       - an employer of different forms of proprietorship, dealer companies, medical
          funds, insurance medical organizations.

3) Marketing in the sphere of public health is characterized by:
       - asymmetry of information at producer and consumer’s disposal in the
           respect of properties of the service offered;
       - complete trust in a seller of medical services;
       - absence of a clear interconnection between doctors’ labour costs and final
       - priority of social and medical effectiveness over economic one.

4) Major types of public health marketing are:
       - marketing of medical services including the process of elaboration,
           promotion and distribution of medical services with the account of people’s
       - marketing of organizations (creation and support of people’s relationships
           with medical institutions);
       - marketing of individuals (creation and support of relationships with a
           definite specialist);
       - marketing of ideas (elaboration and realization of forms and methods of
           social character: promotion of sound way of life, refusal from negative
           habits, family planning etc.).

2. Marketing research on the medical services market.

1) One of the public health market constituents is the market of medical services.
    Medical services market is the totality of medical technologies, equipment,
    methods of medical activity arrangement, pharmaceutical means which are
    distributed in conditions of competitive economy.
2) Marketing research are systematic definition of the range of data necessary in
    the respect of marketing situation facing definite organizations, their selection,
    analysis and the account of the results.
a) Marketing researchers solve the following tasks:
    - research of market characteristics;
    - analysis of market share distribution between firms;
    - sales analysis;
    - research of tendencies of business activity;
    - research of competition of goods, short-term prognosis, research of the
       reaction to new goods and their potential;
    - long-term forecasting;
    - research of price policy.
b) Marketing researches are conducted by two means: by expert assessment and
    sociologic researches.
    - Method of expert assessment is necessary information obtained by means of
       selection and expert’s questioning according to the suggested questions.
    - Method of sociologic research consists of five stages. The first stage reveals
       the problems and formulates the tasks of research. The second one selects
       the sources of information. The third stage presupposes the collection of
       information; the fourth stage – analyses of the obtained information; the fifth
       one – highlighting the obtained results.
    3) Making-up a plan of therapeutic-preventive institution.
  a) To make up marketing plan it is necessary to answer three major questions:
    - What’s the situation like today?
    - What’s the purpose of marketing?
    - Hoe to achieve the purpose?
    b) Stages of making up the plan:
    - analysis of current situation on the market;
    - defining the tasks and the account of restrictions;
    - elaboration of marketing strategy and definite programmes (terms,
       responsibilities, means etc.);
    - assessment of real opportunities of the programmes to achieve the
    - making-up marketing plan;
    - adoption of the plan;
    - realization of a plan;

   3. Market mechanism of public health services and its major elements.
Mechanism of public health services market functions due to the interaction of
three major parameters: demand, supply and a price.

 1) Demand is a quantity of medical services which patients wish and a re able to
 buy at a specific price at a definite period of time. Demand determinants are:
     - level of people’s income;
     - changes in the structure of population;
     - number of patients in a country;
     - changes in patients’ tastes;
     - increase of demand for medical services.
 2) Supply is a quantity of medical services which doctors can provide to population
 at a definite period of time. Determinants of supply:
     - quantity of doctors;
     - value of medical equipment;
     - perfection of medical equipment;
     - taxes (increase of taxes decreases supply).
 3) Price as a monetary expression of the value of a service is formed while the
     interaction of demand and supply bearers on the market (a patient and a doctor).
     - Price demanded is a maximum price at which patients agree to obtain
         medical services.
     - Price supplied is a minimum prices according to which producers are still
         ready to provide services.
     - Market price for medical services is formed as a result of demand and
         supply interaction.

4. Functions of the public health services market.
1) Market relations strongly influence the development of public health care and
fulfil the following functions: informative, intermediary, price forming and
    a) Informational function. Because of constantly changing prices and credit
       interest rates market gives the participants of production objective information
       about socially necessary quantity and quality of services offered on the
    b) Intermediary function. Economically isolated producers must find each other
       to exchange the results of their activity. Without the market it is not possible
       to define how mutually beneficial this or that technological and economic
       connection is between definite participants of production.
    c) Price forming function. Services of the same use are offered on the market,
       but they include different quantity of expenditures. Market accepts only
       socially necessary expenditures, which are in compliance with the conditions
       of provision of definite services only if a buyer agrees to pay them.
    d) Regulating function. Market can’t exist without competition. Intrabranch
       competition stimulates the reduction of expenses per item provided,
       encourages technical innovations, increases the quality of services.

                              Questions for self-control
           1. Major categories of marketing in public health.
           2. Market mechanism of public health services and its main elements.
               3. Functions of market of public health services.
               4. At the given volume of supply how will equilibrium price and volume
                   of supply of the service A change:
             a) an abrupt population increase will take place
             b) consumers will expect reduction of prices for medical services and
                 income decrease
             c) a service A becomes popular?
             5. Name major functions of market in public health.

                    Lecture 10. Pricing in the sphere of public health

              1. Price of a medical service.
              2. Pricing conception in public health.
              3. Medical employees’ wages under conditions of market economy.

1. Price of a medical service.
1) Price as a medical-economic category.
a) Price is a monetary expression of value, a market parameter which characterizes
   economic relations between sellers and buyers while selling medical goods and
b) Prices in medical services provision fulfil the following functions:
        - informational;
        - stimulating;
        - regulating;
        - distributive.

2) The system of prices for medical services.
a) The system of prices is a totality of prices the interaction of which ensures effective
   functioning of market economy.
b) Groups of prices for medical services:
        - budget evaluation – calculated value of medical services in new economic
           conditions. They are used in the settlement of payments between the
           institutions on one territory or between the subdivisions in one and the same
           institution. The amount of budget evaluation doesn’t depend on the amount
           of real expenses of medical institutions, and methods of their calculation are
           characterized by the principle “from general to concrete”, i. e. total volume
           of limited financial resources is allocated between therapeutic institutions
           according to the principle: to give them as much as possible but not as much
           as needed to improve economic activity;
        - State prices for paid medical services were used in accounts with the
           population for the provision of medical assistance on the cost-accounting
        - Agreed prices for medical services are defined by direct agreements between
           medical institutions and an organization – a client.

        - Medical services tariffs on an obligatory medical insurance. They reflect
           monetary sums which define the level of compensation for medical
           organizations’ expenses while fulfilling the local programme of obligatory
           medical insurance.
        - Free prices for paid medical services. Such a price is formed under the
           influence of a range of factors. It is influenced by laws of demand, supply,
           competition and monetary circulation, functioning on the market of public
           health services.
d) The system of prices for medical services must solve the following tasks:
        - to ensure stability of prophylactic institutions functioning under conditions
           of limited financial resources;
        - to improve the use and reproduction of material and technical base of
           therapeutic processes;
        - to create economic conditions of quality increase of medical services;
        - to promote availability of all types of medical assistance for the population
           of the region and of the country on the whole;
        - to increase every citizen’s interest in health preserving.

3) Mechanism of price formation.
a) Mechanism of price formation is a process of an economic situation analysis by
   economic subjects and elaboration of price policy ensuring the achievement of the
   objectives set.
b) Mechanism of price formation includes the following major elements:
       - defining the objective
       = stimulation of public health services production,
       = provision of sales,
       = maximization of profit,
       = content of the market,
       = entering the market etc.
       - assessment of market structure and expenses
       - a search of the necessary method of price formation
       - defining a final price< control over prices.

4) System of price regulation.
a) System of price regulation is a totality of regulators which influence price movement
   and ensure favourable conditions for the effective functioning of market system.
b) Major elements of price regulation system are self-regulation, regulation by an
   enterprise, state regulation.
        - Self-regulation is the mechanism of free movement of market partners
           (demand and supply mainly);
        - Regulation on the enterprise level includes deals concerning market s
           allocation and price level;
        - State regulation includes price right, price observation, indirect regulation,
           direct regulation, anti-monopoly legislation.

5) Structure of a medical service price:
Medical service price = cost + profit.

2. Pricing conception in public in public health in Ukraine.
1) Methodology of pricing, recommended by the Public health department of Ukraine
a) A basic methodology of pricing in production costs is recommended by the Ministry
   of public health in Ukraine; it take into account the fact that medical services are
   goods of special social importance and prices for them must be regulated by the
   state, not allowing price increase over value.
b) Price level doesn’t depend on quality of a service, because as a result it is estimated
   by a buyer-patient. Quality increase is accompanied with the increase of expenses on
   the provision of services and can be reflected on prices of therapeutic-prophylactic

2) Typical problems of pricing in public health of Ukraine:
a) Social and psychological problems:
        - negative attitude of the majority of the population to paid services;
        - denial of the possibility of treatment standardization by specialists;
        - subjectivity of cost, value and price assessment of a medical service;
b) Communicational problems:
        - differences in indicators concerning the assessment of the volume of
           activity of a therapeutic-prophylactic institution;
        - absence of true information about expenses on medical services;
        - insufficient degree of book-keeping details of extra-costs;
        - absence of communication connections in statistic accounts between
           therapeutic-prophylactic institutions;
c) Methodological problems:
        - absence of a single economic category of medical services and their
        - difficulties of value assessment of medical employees’ labour;
        - absence of the alternative methods of value formation and price calculation
           for medical services;
d) Recruitment problems:
        - absence of managers, marketing specialists, economists for public health
        - absence of managers’ special training of therapeutic-prophylactic
        - absence of necessary knowledge on pricing of medical services.

V.Alexandrovskaya, Ph Belousova V.U, Korjova D.A..

                 Economic theory


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