ECONOMIC ANALYSIS

WHAT IS ECONOMICS? Is the social science that is concerned with the production, distribution and consumption of goods and services.

Deals primarily with the allocation of scarce resources to alternative uses. This may refer to the behavior of an individual, the distribution of limited resources ( his income) over expenditures that satisfy different needs( foods, clothing, recreation)

ECONOMICS
The term economics comes from the Ancient Greek oikonomia, management of a household, administration from oikos, house + nomos, custom or law, hence rules of the household.

Basic terms of Economics

SCARCITY-occurs when societys wants exceed the ability of the economy to meet these wants. CHOICE- act of choosing something or somebody: a decision to choose one thing, person, or course of action in preference to

SPECIALIZATION-Economics studies show the participants in the economy (people, businesses, countries) specialize in the task to which they are particularly suited.
EXCHANGE- complements specialization. Without exchange, specialization would be of no benefit because individual could not trade the goods in which they specialize for those that other individuals produce.

WHAT IS ECONOMIC ANALYSIS?

A systematic approach to determining the optimum use of scare resources, involving the comparison of two alternatives in achieving a specific objectives under the given assumption and constraints.

Scope of Economic Analysis

The purpose of the economic analysis of a project is to bring about a better allocation of resources leading to enhanced incomes for investment or consumption. For directly productive project, where output is sold directly to relatively competitive environment, choices are made within the economy to ensure that projects selected for investment meet a minimum standard for resource generation and to weed out those projects that do not.

Objectives of the Economic Analysis

The ultimate objective of the economic analysis is to provide s decision-making tool which can be used not only for the pilot project but also for demonstration purpose. Traditionally in project planning, decisions on which projects to fund and implement relied on a combination of political decisions and calculation of rates of economic return from alternative projects, compared to the opportunity cost of money.

Procedures for Economic Analysis

Defining a project objectives and economic rationale Forecasting effective demand for project outputs. Choosing the least cost design for meeting demand or the most cost effective way of attaining the project objectives. Determining whether economic benefits exceed economic cost.

Assessing whether the projects net benefits will be sustainable throughout the life of the project. Testing the risk associated with the project. Identifying the distribution effects of the project, particularly on the poor one.

Four common types of Economic Analysis

1. COST MINIMIZATION ANALYSIS A determination of the least costly among alternative interventions that are assumed to produced equivalent outcomes. 2. COST-EFFECTIVENESS ANALYSIS A comparison of cost in monetary units with outcomes in quantitative non-monetary units.

3. COST-UTILITY ANALYSIS A form of cost effectiveness analysis that compare cost in monetary units outcomes in terms of their utility, usually to patient, measured. 4. COST-BENEFIT ANALYSIS Compare costs and benefits both of which are quantified in common monetary units.

The Three Types of Economic System

1. Market Economy In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. Market decisions are mainly dominated by supply and demand.

Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the predetermination of prices for different commodities, and the amount of regulation controlling different industrial sectors.

2.Planned Economy Also called a command economy The planned economy is government directed, and market forces have very little say in such an economy.

The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government.

3.Mixed Economy
In a mixed economy there is flexibility in some areas and government control in others.

A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country-both sectors play an important role in the economic decision-making of the country.

LAW OF SUPPLY AND DEMAND

Defines the generally observed relationship between demand, supply and prices. Backbone of market economy.

1. The Law of Demand

Law of demand is an economic law that states consumers buy more of a good when its price decreases and less when its price increases. (ceteris paribus) If the price of the good increases, the quantity demanded decreases, while if price of the good decreases, its quantity demanded increases.

2.The Law of Supply

The tendency of suppliers to offer more of a good at a higher price. The relationship between price and quantity supplied is usually a positive relationship.

3. Equilibrium
When supply and demand are equal ( i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.

4.Disequilibrium
o Occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply o If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.

2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

THANK YOU FOR LISTENING !!!! Ms. Vanessa R. Bernardino Maed-EM Discussant