This process continues - if necessary using third and subsequent preferences - until one candidate gets an absolute majority.
Where is preferential voting used?
Also known as "alternative vote", preferential voting is used to elect Australia's House of Representatives and most Australian state lower houses.
Papua New Guinea uses a more limited preferential system. Ireland's president is elected by preferential voting.
In Britain, the Liberal Democrats' push for electoral reform has received a major setback after the preferential option was defeated heavily in a referendum earlier this year, which saw the majority of voters sticking with first-past-the-post (FPP).
What are the advantages of the preferential system?
It ensures that the person elected has gained at least 50 per cent of the total vote. Under (FPP) - one of the other referendum options - a candidate can be elected with a much lower percentage of the vote.
Some people argue the preferential system is unfair because the winner is not necessarily the candidate who is the first choice of most voters. The winner can claim to be the least disliked candidate, however.
Voters are less likely to feel they are casting a "wasted" vote for someone who has no chance of winning if their other preferences can influence the final outcome.
For example, nearly 80 per cent of voters who gave their first preference to the Greens in last year's Australian election gave their second preference to the Australian Labor Party candidate.
Like FPP, all MPs are accountable to an electorate. Similarly, preferential voting tends to promote a strong two-party system with one or other major party likely to win an absolute majority in Parliament and not need the help of other parties to govern.
This is not always the case, however.
The current Australian Government led by Julia Gillard is a minority Government relying on a Green and three independent MPs to stay in power. Preferential voting also works against candidates from extremist parties because they are unlikely to pick up many second preferences.
What are the disadvantages of preferential voting?
It is not a proportional system. It is classified as "majoritarian" like first-past-the-post.
Minor parties struggle to get MPs into Parliament. For example, the Australian Greens secured nearly 10 per cent of first preferences in last year's Lower House election, but won just one of that chamber's 150 seats.
There is a risk that voters will cast "donkey votes" by ranking candidates unthinkingly. Many voters end up relying on "how to vote" cards handed out by political parties. These cards instruct voters how to rank candidates to their favoured party's advantage.
