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Chipped Out: How Economics Explains the Global Microchip Shortage

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Chipped Out: How Economics Explains the Global Microchip Shortage

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A look at market failures, supply and demand, and government responses

Presented by: Rylee, Quincy, Ben, Daniel, Sebastian, Shayaan

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In 2020, the world experienced a major shortage of microchips

Chips are used in electronics, vehicles, medical devices, and more

The shortage caused price hikes, production halts, and long delays

This is a great example of a market failure in action ( Market failure happens when the free market can’t allocate goods efficiently )

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•Market Failure: When the free market can’t allocate resources efficiently

•Supply & Demand: COVID reduced supply while demand skyrocketed

•Opportunity Cost: Auto manufacturers cut orders to save money, lost profits later

•Externalities: Environmental costs of new chip fabs

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This infographic provides a visual representation of how geopolitical tensions between Taiwan and China can impact global economies, particularly in industries heavily reliant on semiconductors.

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Coordination failure: Lack of planning across industries.

Just-in-time inventory systems weren’t resilient.

Geopolitical risk: Taiwan-China tension & droughts made things worse.

Market power: Few firms dominate chip production

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Rylee- What was the microchip shortage? Video

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•Normally, supply meets demand at equilibrium price

•In a shortage, quantity demanded > quantity supplied → excess demand

•Price rises but still not enough supply

•Deadweight loss: Missed trades due to shortage.

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Tech Companies (Apple, Sony, Intel)

Needed steady chip supply during the shortage but were able to pay higher chip prices and lobby for domestic production

Because of the chip shortage demand for electronics exceeded supply

Auto Industry (Ford, GM)

Automobile production decreased and companies lost revenue from delayed shipments, selling less cars and cancelled orders

Car prices went up and car availability went down negatively impacting consumers

Healthcare Sector

Caused massive medical device shortages and delivery issues which impacted patient care as well as healthcare revenue

Called for crisis because chip supply because healthcare was a priority

Governments

Focused on restoring economic and national security affected by the chip shortage and responded with the CHIPS Act (costing over $50B)

Consumers

Because the chip supply was already low and what remained was used by big companies, consumers faced increased chip prices and less chip options/availability