Elasticity of Supply · Paper 2 — Free Economics HL Practice Questions

The global supply of semiconductors (microchips) is dominated by a few large firms, such as TSMC (Taiwan) and Samsung (South Korea). In 2021, a surge in demand for electronics during the COVID-19 pandemic led to a global semiconductor shortage. Manufacturers struggled to increase output quickly because building new fabrication plants ("fabs") requires 2–3 years and costs over USD 10 billion. In contrast, the supply of freshly harvested coffee beans is more responsive to price changes in the short term, as farmers can allocate more land or labour within a single growing season.

The global market for semiconductors experienced severe supply chain disruptions between 2020 and 2023. A sudden surge in demand for consumer electronics coincided with factory shutdowns in key producing countries. Consider two markets within the semiconductor industry: - Market A — Standard memory chips (DRAM): produced using highly automated, standardised processes that can be scaled up or down relatively quickly; spare production capacity exists in several countries. - Market B — Advanced logic chips (3-nanometer processors): require extremely specialised fabrication plants (fabs) that take 3–5 years to build and operate near maximum capacity 24/7. In 2022, the price of standard memory chips rose by $40\%$ and the quantity supplied increased by $60\%$. For advanced logic chips, the price rose by $50\%$ but the quantity supplied increased by only $5\%$.