South-Western College Publishing - Economics  
The Computer Age Doesn't Eliminate Paper, It Just Shrinks the Size of Paper Companies
Topic Profit Maximization ; Production and Costs
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Reference ID: A160597448

News Story The computer age is here, but rather than creating a paperless society, it has created a "less-paper" society. Demand for paper products such as newsprint has flattened since 1990, as has demand for paper bags, white copy paper and other paper products. The only paper product that seems immune to such decreases is tissue.

Such flattened demand has led companies to start reducing their size. International Paper sold off a forest the size of Massachusetts recently, and is eliminating the company's interest in home-building lumber, magazine paper, and others. Weyerhauser is in the process of selling off its "fine white paper" division to a Canadian rival. The only thing that is saving these companies during the decline in demand is that mill closures have helped keep price up.

Companies in paper industries are soon to be hit with cheap imports. Currently, Brazil makes the cheapest paper globally, although paper from Russia and China is less expensive than in the US. This will only increase the headaches of US paper companies.

Is there aspirin for US companies? Some developing countries are seeing an increase in demand for paper products, as demand for newspapers, etc, increase in those countries, especially those where computers and internet technologies have not yet taken off. But that is only a matter of time until those countries start moving the way of the US.

Questions
Discussion Questions:
1. Give some examples of long-run cost reduction offered in the article summary. Draw a graph of long-run average costs to illustrate what is happening in the article.
2. Draw a graph of supply and demand to illustrate what is happening in the article. Be sure to include all of the curve shifts outlined in the summary. What is the ultimate change on price?
3. Is this an example of a paper company's attempt to achieve economies of scale? Why or why not?
Multiple Choice/True False Questions:
1. The article suggests that price hasn't fallen in the wake of the decreased demand. This could be because:

  1. Paper products don't follow the law of demand.
  2. Supply has been falling faster than demand has been falling.
  3. The increased demand in other countries has buoyed demand in the US.
  4. None of the above.
2. True/False. The sale of portions of paper companies' business is an example of long-run cost reduction.
3. Firms that sell of portions of their businesses in the long run do it so that
  1. Marginal costs fall in the long run.
  2. Average costs fall in the long run.
  3. Sunk costs are eliminated.
  4. Firms experience economies of scale.
Source "Flat Prospects." The Economist. March 15, 2007.
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