In recent decades much progress has been made in applying game theoretic models to a wide range of economic problems. Indeed, Varian claims that most economic behaviour can be viewed as special cases of game theory.
Game theory is divided into two branches, cooperative and non-cooperative.
In non-cooperative game theory, individuals cannot make binding agreements and the unit of analysis is the individual who is concerned with doing as well as possible for himself, subject to clearly defined rules and possibilities. In cooperative game theory, binding agreements are allowed and the unit of analysis is the group or coalition. This discussion will concern itself exclusively with non-cooperative game theory. Furthermore, I will avoid complex mathematical equations and detailed analysis of the fundamentals of the theory, choosing instead to outline the most important concepts in simple terms and to see how the theory applies to specific economic examples. Hence studying the interactions of ideally rational people should aim to help our understanding of the behaviour of real individuals in real economic situations.