backward integration into the production of rapeseed oil can provide a competitive advantage for the pencil manufacturer.
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Backward integration refers to a strategy where a company expands its operations by acquiring or controlling the suppliers or producers of its inputs or raw materials. In this case, the pencil manufacturer would be looking to integrate backward into the production Show more…
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In a famous essay on the market system, the economist Leonard Read discussed how a pencil sold by the U.S. firm Eberhard Faber Pencil Company (now owned by Paper Mate) was made. He noted that logging companies in California and Oregon grew the cedar wood used in the pencil. The wood was milled into pencil-width slats at a factory in San Leandro, California. The graphite for the pencil was mined in Sri Lanka and mixed with clay purchased from a firm in Mississippi and wax from a firm in Mexico. The rubber was purchased from a firm in Indonesia. Was it necessary for the managers of all these firms to know how the components they produced were assembled into a pencil? Was it necessary for the chief executive officer of the Eberhard Faber Company to know this information? Briefly explain.
Jennifer S.
Leadbelly Co. sells pencils in a perfectly competitive product market and hires workers in a perfectly competitive labor market. Assume that the market wage rate for workers is \$150 per day. a. What rule should Leadbelly follow to hire the profit-maximizing amount of labor? b. At the profit-maximizing level of output, the marginal product of the last worker hired is 30 boxes of pencils per day. Calculate the price of a box of pencils. c. Draw a diagram of the labor market for pencil workers (as in Figure 4 of this chapter) next to a diagram of the labor supply and demand for Leadbelly Co. (as in Figure 3). Label the equilibrium wage and quantity of labor for both the market and the firm. How are these diagrams related? d. Suppose some pencil workers switch to jobs in the growing computer industry. On the side-by-side diagrams from part (c), show how this change affects the equilibrium wage and quantity of labor for both the pencil market and for Leadbelly. How does this change affect the marginal product of labor at Leadbelly?
How shifts in demand and supply affect equilibrium. Consider the market for pens: Suppose that a new educational study has proven that the practice of writing, erasing, and rewriting improves students' ability to process information, leading parents to steer away from pen use in favor of pencils. Moreover, the price of ink, an important input in pen production, has increased considerably. On the following graph, labeled Scenario 1, indicate the effect these two events have on the demand for and supply of pens. Supply Demand QUANTITY (Millions of pens) Next, complete the following graph, labeled Scenario 2, by shifting the supply and demand curves in the same way that you did on the Scenario 1 graph. Scenario 2 Supply Demand QUANTITY (Millions of pens) Compare both the Scenario 1 and Scenario 2 graphs. Notice that after completing both graphs, you can now see the difference between them that wasn't apparent before the shifts because each graph indicates different magnitudes for the supply and demand shifts in the market for pens.
Andrew D.
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