Unit 1
Unit 2
The Australian Economic System
Competition
If you are in a race against another person, you will do whatever you can to win. Rules have been put in place to ensure that a race like this is fair. For example, everyone starts from the same place, and you can’t interfere with another runner during the race.
Similar rules exist to ensure that competition in the Australian market place is also fair. In an ideal world these rules would be able to be applied equally across all markets, but unfortunately this isn’t always possible. There are a number of different types of markets that you will need to explore.
Perfect Competition
Perfect competition exists in theory, and we can work towards it in the Australian marketplace. For competition to be considered “perfect” there needs to be a situation in which no one in the market has more power than anyone else. This means that we must have a lot of buyers and sellers, and both should have perfect knowledge of the market. It also means that there should be no intervention from outside sources (such as the government).
While this isn’t really possible, you can see a close approximation when you visit the Victoria Market. For example, if you wanted to buy an apple at the Victoria Market you would find that there are many sellers, and lots of people looking to buy. Also, as the sellers are so close to each other it is easy for you (and for them!) to see how much each seller is expecting for their apples. As a result, sellers will seek to keep their prices as low as possible (to maintain their market share) and the buyer will be able to buy an apple for a relatively low price.
Oligopoly
In the 1980s only two companies were able to sell tickets for passengers to fly between cities in Australia. After 1990 the industry was deregulated (more companies were allowed to enter), and as a result we pay lower prices for domestic air travel today. Despite this, we still couldn’t argue that this is an example of perfect competition. The problem is that we don’t have enough sellers.
An oligopoly exists when there is only a small number of sellers in a market. Another example is the market for mobile phone services. A key feature of these markets is that consumers don’t have many choices. As a result, sellers are able to maintain slightly higher prices and still make sales. This is inefficient; the sellers have taken some of the power in the transaction, and therefore they can consider factors other than the actions of consumers when they are setting prices.
Monopolistic Competition
Monopolistic competition exists when you see a lot of buyers and sellers, but we are able to differentiate between the products that they are selling. For example, if you decide to go out to a restaurant for dinner, it would be unrealistic to assume that all of your options are the same and you will therefore make the decision solely on price. One night you might want Japanese food, and the next night a hamburger. The two are very different. This also applies to breakfast cereal, computers and DVDs. In fact, it applies broadly to many markets in Australia.
As a result, the seller will maintain a certain degree of control over the prices that they set. A restaurant selling Chinese food might be one of ten restaurants in a particular area, but if they are the only Chinese restaurant then, to a limited extent, they can act as a monopoly.
Monopoly
A monopoly exists when there is only one seller in a particular market. As a result, this seller will have a high degree of market power. In other words, the seller will be able to act as a price setter rather than a price taker. A monopoly will generally only be able to exist when there are very strong barriers preventing other operators from being present in the market. There are several barriers that could exist:
1. The capital requirements could be very high: For example, it would be very difficult for a competitor to open a new train service in Melbourne unless they were given access to the existing infrastructure (such as the rail lines).
2. Technical capability: Sometimes a firm creates a new process or a unique approach, and it can take some time before other firms can duplicate the process. For example, when new drugs are released on to the market, or when Microsoft created the first operating systems.
3. Access to natural resources: If only one firm can access the natural resources that are required, then a monopoly will result. The Organisation of Petroleum Exporting Countries (OPEC) doesn’t control all of the world’s oil, but they do control such a large percentage of it that they are able to act as a monopoly.
4. Economies of scale: As a firm increases their production, it is often true that the cost per item will fall. This can mean that they are able to sell their products at a lower cost, which can force others out of a market. Companies like Costco and Bunnings Hardware attempt to achieve economies of scale by operating warehouse style businesses, and this can make it difficult for others to compete in the market in the long term.
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