ABSTRACT
The theory of production in Chapter 4 suggests that inputs can be used in various proportions to produce health care services. Isoquants define the technically efficient combinations and form the boundary of feasible production possibilities. However, it is not enough to know that production is technically efficient – we want to minimise the cost of production of services. What is required is a way to identify the technically efficient combination of factors of production that minimises cost. We do this by adding a set of isocost lines to the analysis. (Points on the isocost line are points of equal cost.)
When we refer to minimising cost, this is defined as minimising the cost of any given quality and volume of services. It is always possible to cut costs by doing less or doing it worse. This may or may not be a good thing. However, reducing the cost of any given quality and quantity of services always allows more to be achieved with the given resources.
