Economic Analysis
Economic analysis involves assessing or examining topics or issues from an economist’s perspective. It is the study of economic systems. This may also involve studying a production process or an industry. The goal is to determine how effectively the economy, or something within it, is operating.
For example, an economic analysis of a company focuses mainly on how much profit it is making.
Economists describe economic analysis as a systematic approach to determine the optimum use of scarce resources.
According to Template.net, which provides ready-made analysis templates:
"Economic analysis involves comparing at least two alternatives in achieving a certain goal under specific constraints and assumptions."
Economic analyses take into account the opportunity costs that people or companies face. They measure, in monetary terms, the benefits of a project to the economy or community. Opportunity cost is the evaluation of the option you gave up when you made a choice.
"Economic analysis is the study of economic systems or a production process. The aim is to determine whether it operates effectively and how profitable it is."
Apart from economists, statisticians and mathematicians may also carry out economic analysis.
The Asian Development Bank notes:
"Economic analysis is a means to help bring about a better allocation of resources that can lead to enhanced incomes for investment or consumption purposes. Therefore, it is best undertaken at the early stages of the project cycle."
Economic Analysis – Methods
For companies, the goal of an economic analysis is to provide a clear picture of the current economic climate — specifically, the potential impact on the company’s ability to operate commercially.
- Economic climate means economic conditions — the state of the overall economy.
- Analysts conduct an in-depth appraisal of market strengths and weaknesses.
They may choose from several different methods.
Cost/Benefit Analysis (CBA)
- Determines a project’s feasibility (also called a feasibility study).
- Weighs costs against potential benefits.
Example – Warehouse Robots:
- A company has 20 warehouse employees earning $30,000/year each = $600,000/year in wages.
- Over 10 years: $6 million (no wage increases or inflation considered).
- Four robots cost $150,000 each, with 10 years of free maintenance = $600,000 total.
- One roboticist is needed at $50,000/year = $500,000 over 10 years.
- Total 10-year cost = $1.1 million.
- Savings over 10 years = $4.9 million.
The directors will likely approve the project after reviewing these figures.
Automation in Other Sectors
Automation isn’t limited to manufacturing. Service industries, especially financial companies, are also embracing it. For example, Inside Bitcoins noted in a bitcoin lifestyle review that personal assistants on financial platforms are gradually being replaced by automation.
While companies could keep employees, modern markets are highly profit-oriented — staff retention is no longer the priority it once was.
Cost/Effectiveness Analysis (CEA)
- Weighs a project’s effectiveness against its cost.
- Low cost doesn’t always mean better results.
Example – Defect Detection:
- Human workers in the warehouse sometimes spot product defects, even though it’s not part of their official duties.
- Losing this ability could cost more than $4.9 million over a decade due to returns, repairs, and dissatisfied customers.
In this case, the company might decide to:
- Halt full automation.
- Keep some human workers alongside robots.
Main Types of Economic Analysis
- Cost-Effectiveness Analysis (CEA)
- Cost-Utility Analysis (CUA)
- Cost-Benefit Analysis (CBA)
Economic Analysis in Health
Economic analysis in healthcare often focuses on CEA and CUA. CBA is less common because it requires assigning a monetary value to human life.
a. Cost-Effectiveness Analysis (CEA)
- Commonly used in randomized trials of health interventions.
- Compares the cost of achieving a specific goal using a new method vs. the current method.
Incremental Cost-Effectiveness Ratio (ICER):
"(Cost of new method – Cost of current method) ÷ (Effect of new method – Effect of current method)"
This shows the extra cost per additional unit of effect.
b. Cost-Utility Analysis (CUA)
- Measures outcomes as utility — the impact of an intervention on health status.
- Combines mortality (life lost) and morbidity (life lived with disability).
- Common measures: DALY (Disability-Adjusted Life Year) QALY (Quality-Adjusted Life Year)
DALY Formula:
"DALY = YLL (Years of Life Lost) + YLD (Years Lived with Disability)"
- QALY uses a scale from 0 (dead) to 1 (perfect health).
- Both DALY and QALY can be equivalent if calculated with comparable parameters.
c. Cost–Benefit Analysis (CBA) in Health
- Expresses both costs and effects in monetary terms.
- Decision: If benefits exceed costs, the intervention is approved in economic terms.
Challenge: Requires placing a monetary value on human life — a controversial step.
