Economic analysis is a useful tool for understanding the complexities of market dynamics, making informed decisions and predicting future trends. It examines various economic indicators, trends and factors to gain insights into an economy’s health and performance. It is used by a variety of businesses to make decisions and also by government agencies to evaluate and develop policies. This article discusses the main tools, purpose, methods, types and key elements of economic analysis.
Economists use several different techniques to perform economic analysis, but most involve collecting data and constructing general economic theories or principles from specific observations. This is known as the deductive method of economic analysis and starts with the identification of a phenomenon, then a search for relevant facts. Finally, the collected information is analyzed and predicted using an economic model.
Another approach to economic analysis is the inductive method, which involves starting with specific observed facts and building a theory from there. This is commonly called empirical economics and is often used in research studies.
One of the fundamental concepts in economic analysis is opportunity cost, which is the value of the highest valued alternative that was forgone to make a choice. In practice, this concept is illustrated with the production possibilities frontier (PPF), a graphical device that shows an economy’s efficient quantity of two goods, given its resources and technology. Efficient production and the PPF are often assumed in economic analysis, although other assumptions may be made to reduce uncertainty.