(2017) A Level H2 Econs Essay Q1 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)

(2017) A Level H2 Econs Paper 2 Essay Q1

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1. In the small island economy of Singapore, producers face different constraints from those in larger economies.

(a) Explain how firms in Singapore will be affected by constraints, such as having a small domestic market and a lack of resources. [10]

Constraints of a small domestic market 

  1. Firms may not be able to reach a substantial level of output to reap economies of scale when producing only for a small domestic market. 

  2. Average costs can thus be kept high due to absence of economies of scale 

  3. To increase size of output, firms can produce for export, but is subjected to tariffs & transportation costs 

 

Constraints of a lack of resources 

  1. The need to rely on imported inputs —> increases cost of production (incurs a transportation cost for importing inputs) 

  2. Limited labour resources —> access to labour inputs is limited due to the small population size —> high labour costs —> increases cost of production 

(b) Assess which are the appropriate policies that firms and governments could adopt to overcome such constraints. [15]

Policy #1 – Merger 

  1. Mergers involve a few smaller firms teaming up to become a larger firm 

  2. This allows firms to produce at a higher level of output 

  3. Economies of scale can thus be derived 

  4. Example  - potential Keppel/Sembcorp merger currently a possibility 

  5. Mergers may not always yield overall benefits (EOS may not always be derived) 

 

Policy #2 – Protect Infant Industry 

  1. Governments can choose to protect firms they consider to be too small but may gain a comparative advantage 

  2. Such policies can include the provision of subsidies to lower the firms’ cost of production or the implementation of tariffs on imported rival goods to help the local firms fend off competition 

  3. This may however invite retaliation 

 

Policy #3 – Signing of Free Trade Agreements 

  1. Signing of free trade agreements can help remove tariffs on goods produced by local firms 

  2. However, can also subject firms to more foreign competition 

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