We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Business

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is Economic Cost Analysis?

By Osmand Vitez
Updated: May 17, 2024
Views: 4,379
References
Share

Economic cost analysis represents a method companies use to determine how additional production will affect a company’s bottom line. This type of analysis often has a concern with what happens when the company produces one additional product. The increase in profits compared to the increase in production costs is of essential importance as a company typically attempts to reach an economy of scale point. Economy of scale means large organizations can reduce costs by increasing output, thereby lowering the per-unit costs of production. Economic cost analysis can also discover diseconomies of scale when production output increases to a point that costs increase higher than potential profits.

In macroeconomics, supply and demand rule a free market economy. The principle states that an equilibrium point exists in all markets where total production output — that is, supply — meets the total demand for goods by consumers. This principle also works its way into companies, often via economic cost analysis. For example, a company may have low production output as they enter a market. This allows the company to measure both costs and profits to ensure the business can make money with the new production process.

Companies often have an interest in economic cost analysis due to the different factors present in a business market. Once the company has a bead on the costs and potential profits necessary to run operations, it then can begin to look at external factors. For example, competition, quantity of available resources, and government regulations that restrict a company’s actions in a given industry are common external factors. These factors can increase the costs of doing business, ultimately lowering any financial returns. If the benefits from increased production fail to materialize, the economic cost analysis proves worthy of its analysis.

Economies and diseconomies of scale are typically among the most important items in economic cost analysis. Companies often compute a marginal cost for each unit, which represents the additional costs for producing one more unit than previously. Then, they create aggregate reports of how many more additional units they can produce and lower fixed costs on a per-unit level. This portion of economic analysis typically provides good data for calculating profitability. This analysis works well for the entire company and specific product lines or divisions.

Diseconomies of scale occur at some point for almost every organization. Companies must ensure production output does not exceed this point. When it does, the company receives no more economic benefits from higher production output, creating financial losses rather than gains.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-is-economic-cost-analysis.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.