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.
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.
Before we go on to the other market forms, oligopoly and monopolistic competition, we will introduce a tool called game theory. Game theory is a much younger tool than most of the others we have discussed so far and has become a large field of research. Here, we will just present two different games.
These will get to represent the two different groups of games: normal form games and extensive form games. We will later use these tools in the analysis of oligopolies.
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 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.