JC Economics Essay Supply Side Policies & Market Structures Model Answers
A post Covid-19 Singapore is one that accelerates transformation in the digital space to offer unlimited opportunities for its businesses and citizens, ato emerge stronger and sustainable together. According to the Emerging Stronger Taskforce (EST), they makes five recommendations to drive the Republic’s transformation as a node for technology, innovation, and enterprise.
They are:
– creating new virtual frontiers
– seizing growth opportunities from sustainability
– enabling global champions and growing an agile and strong Singapore core
– institutionalising private-public partnerships through Alliances for Action (AfAs), and
– strengthening international partnerships, especially in South-east Asia.
Question
In the 2021 budget, to help SMEs in the current economic cyclical slowdown, the EST taskforce of the Singapore government raised lowered corporate tax, as well as a new industry digital transformation programme which will support the firms and industries through digitalisation, automation and to be ready for global expansion.
Discuss the above measures on the impacts to firms, consumers and the S’pore society. [25]
Supply Side Policies & Monopolistic Competition
Introduction
1. During this current economic cyclical slowdown, the TR of firms will fall since dd for their goods may decrease. If the decrease in TR is persistent, the firms will then make losses and may decide to exit the industry.
2. Most of the SMEs in Singapore belong to the monopolistically competitive industry. We will use a monopolistically competitive firm in the analysis below. (Sketch your own diagram) The MPC firm incur losses of area P1ABC (since TR<TC), the firm may decide to close down in the long run.
Thesis: The measures will be beneficial to firms, consumers and society
To help the MPC firm, lower corporate taxes will help the firm in lowering his taxable income; hence help to lower the firm’s taxes payable to the govt. The firm will be able to have higher profits after tax in this way. Further help such as the government’s transformation program may help firm to reduce cost through ‘automation’ and increase revenue through ‘global expansion’. In this way, the firm may be able to earn normal profits again the LR, so will stay in business.
By ‘automation’, it means the firm is helped to transform production from a capital-intensive production to a more tech-intensive or knowledge based production. This can be done by making use of technology to replace labor wherever possible. This will increase the productivity of the workers, enable firm to produce more output. Hence, will reduce the MC and AC of the MPC firm, shown by a downward shift from MC1 and AC1 to MC2 and AC2 curves. By ‘global expansion’, the government supports the firm to sell goods overseas. This means that the demand for the firm’s goods may increase since there are new overseas markets. There may be more substitutes in the new overseas market, making the DD for the good more price elastic. Hence the AR and MR will shift to the right and become gentler, illustrated by a shift from MR1 and AR1 to MR2 and AR2. At the same time, IEOS can also be reaped and thus help to lower AC and MC.
Using a diagram, we can prove that with a successful transformation program (treat it as a macroeconomic supply side policy), the firm may be able to earn at least normal profits in the LR, so he will stay in business.
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Consumers: the good may become more price competitive since the price falls from P1 to P2. Consumers benefit in the form of lower price.
Government: In the SR, there is an increase in G in the transformation program and a fall in T with raised corporate tax rebates, will lead to SR budget deficits. But in the LR, with the success of these measures, firms will be able to stay and earn more revenue. SG government will be able to collect more tax revenue and so able to decrease the deficits.
Society: Allocative efficiency means consumers value the last unit consumed equal to the opportunity cost incurred in producing this last unit. The condition is P=MC. In this MPC market, AE is never achieved. After the measures are implemented, at the profit maximizing output level, the distance between P and MC has reduced, so we are moving towards AE. Intuitively, with lower price and lower MC after the measures are implemented, the difference between P and MC may fall, this reduces the degree of allocative inefficiency.
Productive efficiency means the cost of producing any given level of output is minimized. With automation, the firms will be able to produce the good at a lower cost, improving productive efficiency. Dynamic efficiency means changes are occurring at the best rate in the economy, there can be an increase in consumers’ choices, improvement in the quality of goods and services and etc. With automation, it means that the firms’ costs can be reduced over time, more resources can be freed to produce more other goods and services, and this improves dynamic efficiency.
Anti-thesis: The measures may not be beneficial to firms, consumers and society
The aims of the government may be upset: While workers still in the automated industries may earn higher income due to higher productivity, but retrenched workers may not find suitable jobs and experience a fall in their income, this will lead to widening income gap among the workers. In addition, with automation, machines will replace workers; this may lead to higher unemployment rate. I workers cannot seek employment in alternative industries, structural unemployment may increase.
These measures will take time to run their effects. In the SR, firms may still make losses, workers may lose their jobs. Hence it is important that the government has implemented /will implement new measures to help them tide over difficult periods, eg. Skillsfuture Fund to let workers attend training in new fields so that they can seek employment in new fields over time. Firms must also be innovative and receptive to automation and global expansion. Using drones to replace waiters for example is work in progress in the right direction, firms have to be daring and carry out all sorts of experiments to achieve success. Workers must be willing to embrace changes and upgrade their skills. In reality, firms are hesitant to invest in machineries and advance to new markets due to unfamiliar business and bureaucratic environment.
These measures are really helping the firms to get ready for the future competition coming from abroad eg when the rising countries such as BRICS catching up with us, the SMEs have to seek alternatives to fight for survival. Singapore domestic market is really too small and to expand overseas is definitely a viable option.
In the long run, if these measures are successful, they will help firms to survive in this increasingly challenging environment. This will then lead to higher economic growth and will enhance the living standards of the citizens eventually.
JC Econs Tutor’s Remarks & Comments:
1. This question is not the usual micro question where both micro and macro effects were the focus when such supply side policy is asked. It is actually looking at the micro effects on consumers, firms and govt, arising from a macro supply side policy. Hence the framework should not be AS/AD, instead should make use of cost/revenue concepts. A significant number of students actually had no framework in their discussion, only brought in total cost will be affected by these measures and hence the firms’ profits would decrease. Followed by the fall in total cost would be passed to the consumers in the form of lower price, so consumers would benefit. Such airy fairy answer really lacks rigour in the explanation.
2. Very few students made use of the ‘economic cyclical downturn’ to indicate that the SMEs may experience a fall in their TR and hence facing a survival problem here. These measures are really to help them to survive this difficult period. The handful who could see this crafted the effects of those measures towards revenue and costs, which is the intent of the question. Many students could identify the market structure of SMEs to be monopolistically competitive industry, so the MPC firm revenue/cost diagram was used in the explanation which is correct. However, they went on to explain how 1 or 2 of the measures could affect the AC or MC only, then moved onto deduce effects of P, Q and profits pertaining to consumers and firms. Later, look at another measure that could affect AR and MR, and then deduce the same effects again. It is puzzling to think of why these changes were not combined together to discuss the final effects on consumers and firms.
3. While there are 3 measures given in the question, many students lumped corporate tax rebates and automation together and discussed they will lead to a fall in AC. It is not true that increase in tax rebates will lower cost of production. This measure will only lower the firms taxable profits and hence increase the firms’ profit after tax, leaving costs unchanged. Automation was not well discussed. Many students saw automation as innovation and went onto discuss the benefits arising from innovation like improvement in the quality of the products. Those who did correctly linked automation to making use of more machinery instead of labour, hence this would increase productivity and lead to a fall in the COP. However, they only thought that AC will decrease while MC will remain unchanged. This was illustrated on the diagram as a downward shift of the AC curve only. In fact, with an increase in productivity, the output per worker increases; it can mean total output increases at a faster rate than total cost, leading to a fall in AC. The cost of producing an additional unit of output will also fall, leading to a fall in MC too. MC curve should also have a downward shift.
4. The global expansion measure was missed out by a good number of students. Only a handful students could see that this measure will increase the demand for the firms’ goods and lead to increase in AR and MR. Even lesser students could see that by venturing into global market, the SME will face even more competition, leading to the deduction that the PED of their good will become more price elastic, illustrated by a rightward and gentler AR and MR curves. Instead, many linked this measure to internal EOS that the firms can experience and hence leading to a fall in AC again. For the society’s point of view, it is not important to say that whether AE or PE is achieved after implementation of these measures. It should be whether we are moving towards AE/PE or further away from AE/PE. As for the AE point, from the correct diagram (combination shifts of AC, MC, AR and MR) the difference between P and MC may increase or decrease depending on the positions of the revenue and cost curves drawn. Students can deduce from the diagram and come to a reasonable conclusion on whether AE has improved or worsen.
Econs Essay #93 | #95