Microeconomics

Definition of Public and Private Goods

A public good is a good that fulfills both of the following two criteria: Nonrival. One individual’s consumption of the good does not affect any other individual’s consumption of the same unit of the good. Examples include lighthouses, television, parks, military defense, and streets with little traffic.

Nonexclusive . It is not possible to exclude anyone from consuming the good. The examples above are usually nonexclusive. A private good is, instead, a good that does not fulfill any of the two criteria, i.e. one that is both rival and exclusive. Most goods are private goods.

When we have studied equilibria so far, it has always been so-called partial equilibria. (A partial equilibrium is one where we assume that “everything else is unchanged.”) However, we have also seen that a change in one variable can lead to changes in many other variables, so the restriction that everything else is unchanged may not be very realistic. For example, a price change can affect the price of close substitutes and complementary goods. We will now study how interactions between two individuals in a very simple economy lead to a general equilibrium, i.e. a simultaneous equilibrium in all markets.

If the firm rents its capital, the problem of how much to rent is, more or less, the same as the problem of how much labor to use. It rents precisely so much that the rental rate becomes equal to the marginal revenue product of capital (compare to Labor), i.e. until

To produce goods and services, a firm uses raw materials, labor, and capital. We will now look at the market for labor. The workers sell their labor, or alternatively the sell their leisure time, for a wage, and their supply depends on their valuations of leisure and wage, respectively.

From the firm’s perspective, it buys labor as long as that gives a positive contribution to its profit. The firm’s cost of labor is the wage, and its revenue of labor is the price at which they can sell the goods. The firm will consequently hire workers until the last produced unit of the good costs as much to produce as the firm is paid for it.

Oligopoly

An oligopoly is a market in which there are only a few sellers. Most of the models in the literature only cover cases in which there are two sellers. Such markets are also called duopolies. As you will see, the analysis of oligopolies is quite complicated. Furthermore, there are several different models that all yield different results. This can be quite confusing. Take some time to see what the differences are in the assumptions and why they give different results. Which model to use, depends on what the situation is in a particular case. Different structures can have dramatically different effects on the market.

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