What Are the Components of an Economic Analysis?

by Catherine Capozzi; Updated September 26, 2017

Businessdictionary.com explains that an economic analysis lists how to allocate scarce resources. Most every project is accompanied by an economic analysis: Building a preschool, deciding where to drill for oil and opening a restaurant all require analyzing economic components. An analysis is delivered as a written report and sometimes accompanies an oral report or presentation.

Function

The purpose of an economic analysis is multifaceted: In some cases, financial institutions read the analysis to determine if they should finance a project. Directors also read the analysis to assess if the undertaking is advantageous to the company. Sometimes, the analysis provides a clear picture of the economic well-being of the company or industry. The company uses the findings to make better decisions or avoid potential problems.

Features

A typical analysis includes details of the proposal or project, estimated risks, projected costs and expected impediments. Thus, the details section for the economic analysis of a restaurant business lists the type of food it will serve and the estimated demographic. The estimated risks might include the low demand during the summer if the restaurant targets college students. The projected costs section details the kitchen equipment, food costs and wages. Expected impediments include paying higher prices for ingredients during the off-season, such as fresh peaches in January.

The analysis typically includes several economic scenarios. Because organizations perform differently during recessions and strong growth, anticipating the financial outcome for both is prudent.

Significance

A well-written analysis saves money in the long run. If, for instance, the report anticipates a sharp increase in the price of steel, an automotive company can plan for the expected increase and buy the commodity in advance. Or, a report could prevent a new business owner from starting an unsuccessful venture: An owner may realize that a luxury dog clothing store will go out of business during a recession in two years without enough savings.

Considerations

Do not attempt to write a formal economic analysis for your own business. Business owners should seek a fresh perspective from a seasoned professional in the industry. Hire a consultant to draft the analysis and use the report to assess the viability and long-term success of your business.

Warning

Even the most thorough analysis can be rendered irrelevant by unseen economic forces. For instance, the economic analysis conducted by businesses in New Orleans a month before Hurricane Katrina hit was no longer useful in light of the catastrophe. Natural disasters, terrorist attacks and a key vendor’s bankruptcy are just a few examples of unpredictable forces that derail the most detailed, well-planned economic analysis.

About the Author

Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.