Economic analysis is the examination and evaluation of economic data to uncover insights that inform decision-making and shape economic policies. It uses tools such as statistical analysis, macroeconomic modeling, and cost-benefit analysis to study and interpret economic trends and behavior.
The use of economic analysis is widespread across industries and disciplines, including law. It is a crucial tool for businesses to understand the effects of various economic factors and how they can impact a business’s bottom line. It has also been applied to areas of law like bankruptcy, antitrust, and family law.
To perform an effective economic analysis, the analyst must first establish a time horizon or period that is sufficient to encompass the immediate and longer-term consequences of the project under consideration. Choosing a too short a time horizon will limit the study’s scope and make it unrealistic to perform. A study of the effects of a bioterrorism attack that only extends to one month would omit many important long-term impacts.
In addition to selecting an appropriate time horizon, the analyst must account for inflation and opportunity costs in his or her analysis. Opportunity cost is the value of the highest-ranked alternative that was forgone when a choice was made. For example, if you spend the evening studying for an economics exam instead of going out to dinner with friends, your opportunity cost is the loss of those dinner plans.
Economic analyses also need to consider externalities, which are the side effects of an activity that affect third parties. This is called a “societal perspective,” and it is an essential component of an economic analysis. For instance, if you build a factory near a lake, the soil composition may change and create environmental hazards that could harm the lives and assets of those who live nearby.