DEFINITION: An Economic Analysis involves assessing or examining topics or issues from an economist’s point of view. It’s a process followed by experts to understand how key elements affect the working of an organization,industry,business etc.
Economic Analysis essentially includes evaluation of costs and benefits.
It commenced by ranking projects based on ECONOMIC VIABILITY then leading to better allocation of resources. It’s the only aim is to analyze the actual welfare impact of the project.
Economic analysis is a study of Economic Systems , whether a production process or an industry.
The analysis mainly focuses and aims to determine how effectively and well the economy or something operates.
Economists say that this analysis is a systematic approach to find out what can be the optimum utilisation of scarce resources.
Not only economists, but also statisticians, & mathematicians also carry out this analysis.
Economic Analysis Can Address the Following Issues/Queries:
· Should the project be undertaken by the private sector or by the public sector?
· What will be the final fiscal impact of the project?
· How will the organization ensure efficiency and equity of cost recovery?
· What will be the environmental impact/effect of the project undertaken?
Economic Analysis Mainly Focuses on Three Major Elements:
· Identifying cost and estimating it related to an investment.
· Identifying and estimating benefits that can be obtained from an investment.
· Drawing a comparison of costs with benefits to determine the appropriateness of the investment.
Cost is one of the major factors for consideration in both financial and economic analysis.
· Assessment of an issue from an economists viewpoint.
· Determines something’s effectiveness.
· Determines something’s profitability.
· Determines optimum use of scarce resources.
· Helps to do proper study of an industry.
· Helps in the study of the production process.
Method for Economic Analysis:
For maximum companies the goal of an analysis is to get a clear picture of the current economic climate. Especially what the impact of the economic climate is or might be in near future on the company’s ability to operate commercially.
People who carry out this analysis first do an intense research on the market and get aware of strengths and weaknesses.
There are different methods of analysis, some of them are :
1. Cost-Benefit Analysis:
This type of economic analysis tries to estimate and determine a given project’s feasibility.
Those who do this analysis carry out the study weigh its costs against its potential benefits.
A business may perform a cost-benefit analysis before.
However, there is a drawback to this analysis as it’s difficult to place a monetary value on some activities such as the benefits of increased public safety versus the cost to increase law enforcement presence in major cities. After performing cost-benefit analysis a small business owner can make an educated and appropriate business decision.
In this analysis we weigh a project’s effectiveness against t’s price. In this scenario, however, a low cost does not always mean better effectiveness.
For example – let’s say you have determined that the cost of installing an automated system that can handle customer order all time,24/7, is the cheapest way to boost or increase your incoming orders.
But after some research you determine that many calls that come into the automated system are not complete, because many callers hang up as soon as they hear the automated voice in the system. Your market research also enables you to realise that most of the customers want to speak or talk to a live representative rather than an automated voice.
A cost effective analysis would help you that the cheaper route of installing an automated system is not effective in getting you more orders.
Depending upon the business you run, you may find that saving money does not help you get a desirable effect on the business.
3. Cost Minimization Analysis:
Cost-minimization analysis aims at finding the cheapest cost to complete a given project.
This is one analysis that most businesses use when cost savings are at a premium. This can also be used when there are multiple ways to accomplish the same task.
For example – A drug manufacturer may compare two drugs that happen to produce the same effect in patients, or a pharmaceutical company may implement which of the given two medications that treat the same illness happen to cost less when produced.
ECONOMIC ANALYSIS is marginal analysis. This means that here one examines the consequences of adding and subtracting from the current state of affairs.
The employer must determine the marginal benefit that it’ll get by hiring new workers as well as the marginal cost.
One should know that an ECONOMIC ANALYSIS is not limited to medium or large-scaled businesses, it’s valuable and helpful in small business firms as well.
Infact small business houses are more required to perform this analysis .