Pencil is a writing and drawing instrument.
The pencil was invention of naturalist Conrad Gesner, who described a graphite-based writing instrument in 1565. Before this, of course, The Ancient Romans had used lead-based styluses, but lead has certain health effects while graphite is non-toxic. Modern pencils were possible after 1564 discovery of large graphite deposit in Borrowdale of England. The first mass production of pencils started in Nuremberg of Germany in 1662.
Pencils are made of two parts: Wooden outside and the graphite core.
The wood is typically cut hexagonal. Most writing pencils are painted yellow these days. There are reasons for this - in 1800s, the best graphite came from China, and pencil manufacturers made pencils yellow (Yellow symbolising wealth and respect). I have also heard a story of a psychological experiment: Pencil maker painted identical pencils green and yellow, and asked people to compare them. When test subjects told the green pencils break more often and are, in general, more boring, yellow won the test.
The graphite core has graphite as the color component and clay as the binding component. By varying the amount of clay, the "softness" can be changed. Typical numbering schemes include numbers #1-#4 (#4 being the softest), and the (at least here) more common scheme of numbering pencils uses combination of letters B for "Black" and H for "hard"; soft art pencils are 8B...B and F and the hard technical drawing pencils are H..10H. Typical writing pen is labeled HB (I've been told it's equivalent to the #2 pencil.) I usually use 2B for drawing, HB for sketching - erasers typically have hard time erasing softer pencils, they just spread the color...
(My choice: Staedtler Mars Lumograph pens - you know, the blue-white ones with a black end.)
"Madame, life without you is like a broken pencil."
- Blackadder II: Chains
(In a (lame-attempt-at-humor) response to now-deleted writeups: They are not obsolete; Yes, I'm a hacker, I wrote this stuff with XEmacs, but I have found that laptops are bulky and you can't write on paper with a Palm stylus, except perharps when you push a bit harder (I'm not going to try, anyway). Besides, I can't afford an expensive art program and GIMP doesn't do much "natural media" stuff yet - replicating real pencils is not yet an option. And they don't need batteries. They say the black thing in it is a solar cell, that's why they work so nicely. =)
Sources: pencil.com, britannica.com, and some book I read ages ago but I can't remember what it was titled - a fine book of trivia...