Chip Makers and the Prices of Consumer Electronics

Correct! - DRAM and HBM are substitutes in production because the same factories, machines, and workers can be used to produce either chip. Producing more of one means producing less of the other.

Well Done! - When firms switched production from DRAM to HBM, the supply of DRAM decreased. At the original price, quantity demanded exceeded quantity supplied, creating a shortage that pushed prices up.

Good Job! - DRAM is a component used to produce consumer electronics. A higher price of DRAM raises firms’ production costs, decreases supply, and raises the price of consumer electronics.

That's Right! - Because it takes about two years to add new DRAM production capacity, firms cannot increase the quantity supplied in the short run. This makes supply perfectly inelastic, so higher prices persist.