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Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

Delhi University Mcom Managerial Economics syllabus :

Objective: The objective of the course is to acquaint students with the basic principles of micro and macroeconomics for developing the understanding of theory of the firm, markets and the macro environment, which would help them in managerial decision making processes.


Part A: Firm and Market

Unit I: Demand and The Firm: Consumer Behaviour: Cardinal and ordinal approaches to the derivation of the demand function. Revealed preference approach. Theory of attributes – Demand for consumer durables. Firm Theory: Objectives of the firm; Theory of the growth of the firm: Marris and Penrose.

Unit II: Production and Cost: Production: Law of variable proportion. Returns to scale. Production function: Concept of productivity and technology. Producer’s Equilibrium. Isoquants ridge lines, Isoclines, Isocost lines. Cost function: Classification of costs, Short run cost functions, Relationship between return to scale and return to a factor, Long run cost functions.

Unit III: Market and Pricing: Market forms: AR-MR. Price taker; Monopoly power. Oligopolistic behavior: Cournot and Stackelberg models. Factor Pricing: Demand and supply of factors of production. Euler’s theorem. Part B: Macroeconomic environment

Unit IV: Product and Asset Market Equilibrium: Product Market: Derivation of IS function. Demand for real cash balances: Tobin’s Portfolio theory. Endogenous money supply and Asset market equilibrium. Derivation of real LM function. Real IS-LM framework.

Unit V: Aggregate Demand and Aggregate Supply: Modern aggregate demand function. Demand Management. Philips Curve. Aggregate supply and the price level. Unit VI: Trade Cycles and The Open Economy: Real Business Cycles. Exchange rate, trade balance, net saving, Macroeconomic movements in an open economy.

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich Freiherr von Stackelberg who published Market Structure and Equilibrium (Marktform und Gleichgewicht) in 1934 which described the model.

Cournot Model Environment  A few firms produce goods that are either perfect substitutes (homogeneous) or imperfect substitutes (differentiated).  Firms’ control variable is output in contrast to price.  Each firm believes their rivals will hold output constant if it changes its own output (The output of rivals is viewed as given or “fixed”).  Barriers to entry exist.

Inverse Demand in a Cournot Duopoly  Market demand in a homogeneous-product Cournot duopoly is P = a − b (Q1 + Q 2)

Thus, each firm’s marginal revenue depends on the output produced by the other firm. More formally,MR1 = a − bQ2 − 2bQ1 MR2 = a − bQ1 − 2bQ2

Stackelberg compared with Cournot

The Stackelberg and Cournot models are similar because in both competition is on quantity. However, as seen, the first move gives the leader in Stackelberg a crucial advantage. There is also the important assumption of perfect information in the Stackelberg game: the follower must observe the quantity chosen by the leader, otherwise the game reduces to Cournot. With imperfect information, the threats described above can be credible. If the follower cannot observe the leader’s move, it is no longer irrational for the follower to choose, say, a Cournot level of quantity (in fact, that is the equilibrium action). However, it must be that there is imperfect information and the follower is unable to observe the leader’s move because it is irrational for the follower not to observe if it can once the leader has moved. If it can observe, it will so that it can make the optimal decision. Any threat by the follower claiming that it will not observe even if it can is as uncredible as those above. This is an example of too much information hurting a player. In Cournot competition, it is the simultaneity of the game (the imperfection of knowledge) that results in neither player being at a disadvantage.

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis, correlation and calculus If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.

Managerial decision areas include:

  • assessment of investible funds
  • selecting business area
  • choice of product
  • determining optimum output
  • sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

  • Risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
  • Production analysis – microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
  • Pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
  • Capital budgeting – Investment theory is used to examine a firm’s capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergraduates and graduate business students. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

Recommended Mcom Notes

M. Com. (Part-I)

M. Com. (Part-II)

Cournot and Stackelberg models for Managerial Economics Mcom Delhi University

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