Production Theory In Health Care

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2.2.1 Health Production framework
Production theory or function in contemporary Economic literature traces the link or relationship between inputs and final output. The process of transforming inputs to outputs (finished goods and services) may take place in various sectors and forms such as manufacturing, transportation, education, banking and healthcare.
The technical (quantitative) relationship that exists between inputs combined in production and the outputs derived from that process is known as the production function or frontier. The function represents the technology and it can be for a particular firm, an industry or the economy as a whole. A production function may be expressed in the form of a schedule, a curve, an algebraic equation
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This factors include; land, labour, capital and organization or entrepreneurship.
Traditional economic theory of production measures a single output for a range of inputs. However, works by Banker, Cooper and Charnes in 1978, as well as other researchers extended this single output to multiple output situation which has gained wide appeal and application in not-profit sectors including schools and hospitals
In the economics of healthcare, Wagstaf (1996) notes that the individual produces his health by combining health inputs or a bundle of inputs which include hospital services, food, and other inputs. The hospital production refers to how a hospital directly improves a patients’ health or ameliorates sickness while employing available human and material resources.

2.2.2 Pareto Optimality Theory
The Pareto optimality concept began in the first half of the 20th century when microeconomic theory approached the efficiency concept from a Pareto perspective. The term Pareto efficiency is named after Vilfredo Pareto, an Italian statistician and economist who used this term in his research of income distribution and economic efficiency. The Pareto criterion holds if no person can be made better off without making someone else worse
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Transaction costs are negligible
d. There are no externalities.

The assumption implied was that firms make optimal decisions on the use of inputs, and that inefficiencies in an economy have their origin in the way resources are allocated across firms, and not within firms. Two main threats to efficiency in this paradigm were monopolies and (international) trade restrictions. The underlying concept of DEA is based on Pareto optimality. A DMU is considered relatively efficient if there is no other DMU or a combination of DMUs which can produce at least the same amount of all outputs with less of one input and not more of any other input (Charnes et al 1985).

2.2.3 Farrel’s theory of Productive
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