Economics Internal Assessment The fall in prices for DRAM memory chips has come about because of a decrease

in demand and an increase in supply which has led to an excess of memory chips in the market, this is where consumers and producers come together to buy and sell the product, and this has caused a price reduction. The two components of any market are demand and supply; demand is the quantity of a product that consumers are able and willing to buy at a given price and supply is the quantity of a product which producers are willing and able to produce at a given price. Initially the market was in equilibrium, a state of rest in the market where the price is stable, at QP1 (P1 was $2.80). However there was a decrease in demand represented on the graph as a demand curve shift from D to D1, the demand curve shift was caused by two things; firstly there had been an earthquake and tsunami in Japan which meant that fewer memory chips were being demanded by this very technologically demanding country as factories and offices that usually needed the chips were either destroyed or closed down. Secondly festive shopping, which had increased demand as people bought presents, had now resulted in decreased demand as people dont spend much after the holidays as they try to save money. Both these factors combine to cause a demand curve shift which upsets the market equilibrium. Price ($) Excess Supply S S1

P1 $2.80

P2 $0.81

D D1

Qd

Qs

Quantity of micro-chips

Furthermore there was also a supply curve shift as the quantity of memory chips that producers could produce increased; again there are two reasons for this, firstly the producers predicted the spike in demand due to the holiday period and therefore increased there supply of the chips, however due to the turbulent economic climate it is possible that less was spent than was thought and therefore even with the increase in demand the increase in supply outstripped it. Secondly many producers increased their capital in order to keep production high as many had predicted a shortage of the DRAM chips, the increase in this factor of production, increased supply. This was further compounded by the fact that all of the major companies such as Samsung Electronics and Elpida Memory felt compelled to increase production together else the ones that didnt could have been outproduced. Together these factors caused a supply curve shift from S to S1. Due to both the demand and supply curve shift the previous equilibrium price of $2.80 created an excess supply of memory chips as consumers were demanding Qd worth of DRAMs whereas producers were supplying Qs of the good, the difference Qs-Qd was the quantity of chips in excess. To get rid of this surplus stock producers lowered prices, using discounts or special offers, to entice more consumers into the market quickly as in this market technology is critical and therefore the old chips would have been made redundant rapidly due to technological advances. Therefore the new market equilibrium was established at QP2 where the new price is $0.84. This is a short run phenomena and in the future the demand curve will shift again, except this time it would be an increase as increased numbers of consumers moved to take advantage of the low prices, in turn driving them higher again, although just how immediate this demand increase would be is debatable as demand is low in the first quarter and demand might not increase until the second demand usually increases, demand could further pick up as companies in Japan need to rebuild. In the long run demand would fall back to normal levels and revert to its cyclical nature with highs in the fourth quarter before holiday season and lows after that. For most this would be seen as decreased computer prices or increased memory as manufacturers sort to increase memory while keeping price constant, for the producers there would be a decrease in profits as the lower price deflated revenue but the increase in demand could well compensate for this. As memory chips are used in all lines of work this could result in a minor decrease in all prices, although this is unlikely as the price change is so small most producers wold not bother but rather the tiny increase in profits that would come along.