How should we expect the cost of oil to affect the cost of

Question

"Oil Prices Poised to Hit Sweet Spot for Global Economy"

1. How should we expect the cost of oil to affect the cost of producing gasoline, diesel and other oil-based products in the US and other parts of the world? Why?

• With rising oil prices, there are several potential factors to consider behind this behavior. The first could be procurement costs related to the crude oil and other materials needed for production. The second could be the actual production/refinement costs to transform a raw material into a completed good. The third could be distribution costs, as they are directly correlated to the cost of oil, being that refined oil/gasoline-powered units of transportation are the major choice in modern distribution and transportation. With Oil being a variable cost in the total cost equation that can affect any one of these factors in the fuel sales process, the total cost of oil/gasoline in general would increase in response to an increase in the Oil variable (which may or may not affect one or more components of the equation).

1. What is the effect of changes in gasoline prices on the demand for restaurant meals? Is gasoline an economic complement of restaurant meals? Are restaurant meals an economic complement of gasoline?

• In any modern economy, the primary mode of transportation is gasoline/diesel powered vehicle. As the cost of oil rises, the collateral affects ripple as close as your neighbor having to change their commute from car to bus, and as far as major manufacturers and distributors having to modify their methods of production, inventory management, and logistics. When taking these things in to account, we find that almost all goods, including a combo meal at a restaurant, can potentially be affected by a change in the cost of oil. As it pertains to restaurants specifically, though gasoline is not an economic complement of restaurant meals, and vice versa, these changes in the cost of oil may not affect your fast-food meal in the short-run, but they can have a, more or less, 'indirect' impact on the cost of goods in the aggregate economy in the long-run.

"Trucking Company Failures on the Rise"

1. There are more than 168,000 interstate motor carriers with more than 2 million trucks in the U.S., according to the American Trucking Associations, an industry group. Does the large number of carriers necessarily indicate that the industry is perfectly competitive?...

• Take the definition of "Perfectly Competitive" into consideration: with that definition in mind, we can determine that this industry, while seemingly indicative of a perfectly competitive industry, is not a perfectly competitive industry. This is highlighted by the many various industries served by each different firm, the specific goods they transport, and by the methods and modes by which they transport (by rail, by truck, by air, etc.). Additionally, the barriers for entry into this industry are considerably high, requiring new market participants to make costly initial investments, regulation standards that add to resource consumption, as well as exceedingly competitive current market participants. 

1. What might you infer about the price elasticity of demand for diesel fuel in the short run? In the long run?

• As mentioned previously, rising costs in oil do not always immediately reflect in the aggregate economy. As it pertains to diesel specifically, because it is closer to the original crude oil, it does not require the same effort or time to process into a consumer-ready product. With this in mind, demand diesel fuel has higher price-elasticity in the long-run because such short-run behaviors do not immediately reflect in its overall usage. However, as mentioned above, rising cost of oil will eventually reflect in long-term demand and consumption as buyers adjust their habits and behaviors to offset the increase in diesel fuel costs. 

"Snack Giant Mondelez Makes $23 Billion Takeover Bid for Hershey" and "Sales Pressure on Mondelez, Hershey Could Bolster Case for Merger"

1. Describe/explain how Mondelez, which is attempting to acquire Hershey, is pursuing economies of scale

• Mondelez acquisition of Hershey demonstrates economies of scale by leveraging each company's existing operational footprint in their industry. By acquiring Hershey, Mondelez streamlines production by combining best practices and capital of each company into a single-process model that maximizes production while decreasing the average cost per unit of output. However, a diseconomy of scale may be experienced if workforce issues, such as compensation and benefits, are improperly addressed when evaluating and executing the merging of Mondelez and Hershey workforce personnel.

1. Describe/explain how Mondelez is pursuing economies of scope. 

• By acquiring well-known, established Hershey, Mondelez can pursue potential economies of scope in a number of ways. In terms of procurement, Mondelez combines two separate operations into a single operation, benefitting procurement through buying inputs of production in larger quantities at higher discount rates, leveraging the Hershey product offering to sell both brands of chocolate (a practice known as 'Umbrella Branding'), and creating the possibility to create product complements between the two brands. 

1. How does the purchase of Hershey provide Mondelez with potential benefits related to learning economies?

• Mondelez acquisition of Hershey pursues such as increased information for research and development to work with (this can also fall under economies of scope). This acquisition of information and data from Hershey allows Mondelez to bypass certain industry and product specific learning curves they may have experienced had they not acquired Hershey. Additionally, Mondelez can merge and integrate the Hershey workforce into itself, and unify practices across organizations while reducing a number of workforce jobs if beneficial to the company in terms of budget and operation. In short, the Hershey acquisition pursues economies of scale through increased production at decreased costs, economies of scope by way of added advantages and optimization to procurement, workforce, and advertising.

Please let me know if my answers follow the laws of economics and are correct.