This chapter provides insights from economic theory and empirical methods to determine if production of medical services in a firm is efficient. The concepts of a production function can indicate whether production is technically efficient and estimate the marginal contribution to revenue of each input (labor of different types, capital, etc.). With data on the prices or wages of these inputs, the manager can determine the profit-maximizing rate of use. A cost function can indicate whether there are economies of scale in quantity (somehow defined) and economies or diseconomies in scope. Examples from classic health economics literature are used to show that there was underuse of physician aides and other substitutes in office-based physician practices, that there are constant returns in scale in the production of hospital admissions, and that there are increased returns in emergency rooms. Caution in interpretation of variation in cost per unit output (of the type provided for Medicare in the Dartmouth Atlas) is offered.