Unit 1
Unit 2
The Australian Economic System
The Role of Households
By now you will have seen that the five sector model attempts to explain how the various participants in the market interact. The role of households is particularly important, and is therefore worthy of further exploration.
The term “household” refers to a group of people who live together in the same dwelling. While some economists have tried to define the term “family”, you will be pleased to know that this is well beyond the scope of the course that you are studying; the umbrella term “household” will cover any group of people who live together.
Ultimately it is households that are able to offer labour resources to the economy. As the Australian economy is structured on capitalist ideals, it is therefore the households who get to decide how our scarce labour resources will be allocated. For example, if wages in a job do not keep pace with inflation (rising prices) then over time fewer people will choose to allocate their labour to that particular profession. Over a long time frame you can see this happen in certain professions. At first you might see a newspaper article suggesting that we are struggling to find people to work in a certain area. This will generally be followed by a call for increased wages in that area, and if the wage increase is granted then more people will begin working. This is particularly true for jobs that are largely supported by the government, such as teachers, nurses and the police.
Households also perform the role of consumers. As a result, they will play a very important role in deciding how our resources are allocated. This is known as consumer sovereignty, which literally translates as “the consumer is king”! Consumer sovereignty is the assumption which states that in a freely operating market it is consumers who will ultimately decide what is produced and in what quantities. This is because suppliers will respond to the actions of consumers.
For example, imagine that you own a small corner store. Each week you buy 100 bananas, and each week you sell exactly 100 bananas. Then one week you only sell 90. The following week you only sell 80, and the week after that you only sell 75. After several weeks you are still selling approximately 75 bananas each week, and then throwing the rest away. What would you do?
Obviously you would buy a lower quantity – you may start buying only 75 bananas. This way you do not waste money on fruit that you will not sell. You have also responded to the actions of consumers. Their change in spending patterns ultimately caused you to alter what you offer for sale in your store.
This happens on a much larger scale as well. Developers will keep building city apartments while demand is strong, but they will find other ways to allocate their resources if they find it difficult to sell the apartments. Airlines will only fly planes between cities if they continue to sell seats, and car manufacturers will remain open for as long as they can keep selling cars. In each case, the producer is responding to the actions of the consumers.
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