2017 H2 Economics Paper 2 Essay 1: Suggested Answers

Firms in Singapore, a small island economy, face constraints from a small domestic market and a lack of natural resources, which shape their strategies and their ability to make profits.

Constraint of a small domestic market. A small market limits the ability of firms to exploit economies of scale, the fall in average cost as output rises. In larger economies firms can scale up production to meet high demand and so lower average costs, but in Singapore limited domestic demand restricts this, leaving average costs higher. A Singapore manufacturer of consumer electronics, for example, may struggle to lower unit costs because local demand cannot justify large scale production, making it hard to price competitively against firms from larger economies such as China or the United States. To address this, many Singapore firms turn to international markets, exporting to widen their customer base and reach economies of scale, though this brings further challenges such as trade barriers, logistics costs and differing regulations.

Constraint of a lack of natural resources. Unlike larger economies, Singapore must import almost all of its raw materials, energy and even water. This dependence makes firms vulnerable to global supply chain disruptions and commodity price swings, so that a rise in global oil prices raises production costs across industries, particularly energy intensive ones such as manufacturing and transport. Singapore's small population also limits the supply of labour, especially skilled labour, so firms compete intensely for talent and face higher labour costs. Labour intensive industries such as construction and manufacturing are hit hardest, and reliance on foreign workers adds further constraints because the government uses quotas and levies to regulate their inflow.