Unit 1
Unit 2
The Australian Economic System
The Role of Businesses
Businesses operate to make a profit. When businesses make a profit it can result in higher living standards for the people who own them. In a capitalist society, we are all able to buy shares in businesses, and in fact Australia has the highest rate of share ownership in the world.
As the five sector model reveals, businesses play an important role in the Australian economy. First, it is from this sector of the economy that we earn our wages. When a business chooses to “purchase” your labour, they will pay you for your time. Consumers are then able to use this money to satisfy their needs and wants. This brings us to the second role of the business sector – they will provide goods and services for us to purchase.
Businesses will use a variety of strategies to try and increase their profitability. Some of these strategies include:
1. Price Discrimination: Knowledgeable consumers will purchase the cheapest option. Businesses will therefore aim to maximise their sales by offering the lowest price that they can. In order to increase market share a business might choose to offer a range of products with varying prices. In some instances price discrimination can be efficient. For example, offering discounted fares to students or pensioners who use public transport is an efficient way of ensuring that these sectors of the community have reasonable access to travel services. On the other hand, charging a person more for their groceries because they live in an affluent suburb is inefficient. Businesses in Australia must be wary of the way in which they use price discrimination, as inefficient forms of this process are illegal, and business owners can be prosecuted by the Australian Competition and Consumer Commission (the ACCC).
2. Multiple Branding: Imagine that there are only two products in a market. If we assume that the quality and prices are similar, then it is likely that each will end up with around 50% of the market. If a third brand entered the market, then each could expect to capture around one third of the consumers. Businesses can take advantage of this situation. For example, if the only two brands of washing powder were Surf and Omo, the makers of Surf might choose to create a second product of their own. This would give them two thirds of the market instead of their original 50%. In other words, they would effectively be “competing” with their own product. This is a very common business practice. As it happens, both Surf and Omo are owned by the same company – Unilever. In fact, Unilever sells six different washing detergents. This allows their products to occupy more shelf space in the supermarket, and they will have a greater market share as a result.
3. Anti-Competitive Behaviour: It is illegal for a company to engage in anti-competitive behaviour in Australia. Despite this, some companies do choose to try and gain an advantage in the market by engaging in these types of activities. For example, when one company works with another to set a price for a particular good or service, they are unlikely to settle on an efficient price. It is more likely that their price will be too high. While this can help to increase company profits, it also means lower living standards for consumers. This is because as the end users of the product, we are forced to use more of our income to buy these products. Cases such as this are also investigated by the ACCC. In recent years, domestic airlines, petrol stations an even the makers of cardboard boxes have been accused of participating in anti-competitive behaviour such as this.
Businesses will always seek to make profits, but we must ensure that they work to do this in the most efficient way possible. This means that we need to see a lot of competition in the Australian market. Understanding how this process is managed is one of the most important factors in this subject.
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