Economic analysis refers to evaluating costs and benefits to check the viability of a project, investment opportunity, event, or any other matter. In other words, it involves identifying, evaluating, and comparing costs and benefits. In addition, there are many other significant concepts involved.
The analysis process contributes to the optimal allocation and use of resources, forming an important element in the decision-making process. For example, the microeconomic analysis makes an effort to describe how people and organizations function in a certain economy, macroeconomic analysis focus on GDP, unemployment, and inflation, and techno economic analysis (TEA) involves the study of the economic performance of an industrial process.
The economic analysis evaluates projects, scenarios, tasks, topics, or actions to understand their profitability or negative consequences. It exhibits a relationship with the study of determining the opportunity cost of any project or task. In business, management uses it in diverse scenarios. For example, companies apply it during new product identification or an expansion or integration process. The analysis process traverses through the pros and cons and understands the matter.
Richard Milhous Nixon, the 37th president of America, founded the U.S. Bureau of Economic Analysis (BEA) in 1972, which, from then on, helped American investors understand the economy of the nation based on relevant data and statistics, The timely and accurate information allow the government, businesses, researchers, and the American public to follow and understand the performance of the nation's economy.
The tools used for the analysis purpose exhibit elements and techniques of statistics and essential mathematics for economic analysis. Furthermore, the process involves various tools and is based on many assumptions.
Let's look into important tools involved in the analysis:
Let's look into examples for a better understanding of the concept involving cost and benefit comparison:
Paul has a small factory producing specific bottled products; currently, he has twenty workers, and the daily output is 3000 bottled products for delivery. Paul plans to employ heavy equipment and machinery and automate the whole process. However, if he does, it will cost him a fixed amount due to machinery purchase and automation system installation costs.
However, the new step increases the production output and reduces the variable labor costs. Evaluating the cost and benefit associated with automated and manual processes implies that the automated process is better. It is a simple economic analysis example through which Paul will assess and go forward with their decision to install new equipment in his factory.
Rudy runs a construction company; he has plans to make a business complex on the land he bought years ago. But before initiating the project, he applied economic analysis to understand the vicinity and the cost-benefit scenario related to the project.
The analysis helps Rudy finds out that the land is near a lake. So the land composition is not solid, and the soil around is mostly wet; this is not only a problematic situation for construction, but it may bring many issues post-construction, and there can be a potential threat to the building.
Also, it may harm the lives and assets of people buying shops. At the same time, people around the land may protest against the construction, and they will have to face many legal issues. So, in the long run, it can be a bad investment. Hence, Rudy finally decides to let go of the project and looks for different alternatives.
It refers to studying or understanding a problem by primarily focusing on positive statements. With the help of an analysis of the actual situation, the statements can be accepted or disapproved.
What do you mean by normative economic analysis?It is the study of desired results or anticipated outcomes. In this type of analysis, the economists study whether and how a particular system or mechanism will work correctly, what will be the preferred scenario, and how the economic challenges can be solved specifically from a moral and ethical perspective.
How to do an economic analysis?The process starts with -
- Identifying the problem
- Defining objectives or goals and also figuring out the consequences of the objectives
- Study or find alternatives to solve the problems by considering the objectives
- Ascertain the critical need for economic analysis
- Choose the method of economic analysis
- Consider and manage uncertainties and errors
- Compute and compare economic performance and consequences
This article is a guide to What is Economic Analysis. We explain its tools, techno, micro, and macro-economic analysis, and examples. You can also go through our recommended articles on corporate finance –
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