Economic analysis is a systematic approach to understanding costs, benefits, and impacts of economic decisions. It’s critical to success, whether you’re evaluating a small business expansion or a major infrastructure investment. Economic analysis helps ensure that resources are used wisely and community benefits are maximized.
There are a variety of approaches to economic analysis, and each has strengths and limitations. It’s important to consider the time horizon and period you are analyzing as well. A shorter horizon may miss longer-term effects, but can be easier to construct and analyze. A broader horizon can be harder to model, but is more likely to capture both short- and long-term effects.
A key assumption in economic analysis is ceteris paribus, which means “all other factors being equal.” For example, if an increase in tuition reduces college enrollment, that decrease must be assumed to have occurred without any other changes in student incomes or the market value of a college degree.
Whether your project will create or lose jobs is also an important consideration for economic analysis. A new restaurant might bring in 50 jobs, but it could also cause a local restaurant to lose 15 jobs. This is known as a negative impact and must be taken into account when determining the economic benefit of the project.
Economic analysis is a powerful tool that can be applied to a variety of situations and industries. However, it’s important to use it carefully and understand its limits when making decisions. By utilizing economic analysis, you can ensure that your business or project is operating at its peak performance.