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Chip Makers and the Prices of Consumer Electronics

EconEye Admin

SK Hynix, Samsung, and Micron, the top three makers of memory chips used in smartphones and PCs (called DRAM), have switched from producing DRAM to producing the more profitable chips used in data centers (called HBM). Prices of DRAM have risen sharply. Adding new capacity to produce DRAM will take about two years.—economist.com

 

Answer the following questions to check your understanding of the story.

1) How are DRAM and HBM related?

DRAM and HBM are ___________.

Wrong! - They are used by different buyers, so they are not substitutes in consumption. They are not produced together. The news clip shows they are directly related through production choices.

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.

2) Why have prices risen in the market for DRAM memory chips?
Prices have risen because __________ in the market for DRAM __________.

Wrong! - An increase in supply creates a surplus and puts downward pressure on prices. As prices fall, quantity demanded increases and the surplus is eliminated. The news clip provides no evidence of an increase in demand.

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.

3) What is the likely effect of the higher price of DRAM on the market for consumer electronics?
The higher price of DRAM will cause __________ in the market for consumer electronics.

Wrong! - Higher production costs reduce supply. Changes in input prices affect supply, not demand.

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.

4) Why is the effect in Question 3 likely to last for at least two years?
The effect is likely to persist because ___________.

Wrong! - Supply is not elastic when output cannot increase. The issue concerns supply, not demand. Demand elasticity is unrelated to production time.

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.

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