This may be a little silly but bear with me…
Imagine that you own a bakery, and you specialize in chocolate chip cookies. You make some other things, but chocolate chip cookies are your thing.
There are a lot of ingredients that go into chocolate chip cookies: flour, sugar, butter, salt, egg, vanilla, and (of course) chocolate chips.
Suddenly there is a decrease in demand for your chocolate chip cookies. Instead of having people lined up down the block for your cookies (think of Levain Bakery on the Upper West Side of NYC), you now just have a few people coming in each hour.
Why? Maybe there is construction on the block of your bakery that prevents people from coming or everyone has temporarily moved out of the neighborhood to their summer homes.
Regardless of the reason for the demand decrease, let’s say you don’t know how long it will last. So, as you are making your purchases for ingredients over the next year, you put in a smaller order for chocolate chips. Based on the current demand, you won’t need as many chocolate chips, so why buy an excess?
At the same time, there is a global (yes, global) increase in demand for chocolate chips. It’s not coming from bakeries making chocolate chip cookies. Instead, people want chocolate chips for their ice cream, cakes, brownies, bread, cheesecakes, cannoli’s, pecan bars, muffins, etc., etc.
To make matters worse, there are some problems with the supply of chocolate chips: the people producing chocolate chips go on strike for a month AND later that year there is a freeze which forces some factories to close.
All in all, we have a problem in the chocolate chip market: huge increase in demand for chocolate chips simultaneous with a decrease in supply.
What does this cause? An increase in the price of chocolate chips. And – even with higher prices – not enough chips for everyone that wants them.
Why? Well you can imagine that making chocolate chips is not instantaneous. It takes equipment and people. Remember how the demand for flour went up but flour companies couldn’t immediately increase their production even though there was wheat available? Or how oat milk suddenly became the latest milk substitute and when firms couldn't increase production fast enough prices responded? Economists describe the rate at which a firm can respond to changing prices as elasticity of supply.
So when the demand for chocolate chips went up, the suppliers couldn’t respond immediately. With limited supply, the price creeps up.
So how does this affect your bakery?
Let's say the demand for your cookies is back up: maybe the road construction ended faster than you expected. There are tourists just lining up down your block to get chocolate chip cookies. You run out of your chocolate chip inventory quickly and you try to order more.
But… you can’t get any chocolate chips. When you cancelled your order with the lower demand, you were placed on the bottom of the list for getting any new chocolate chips.
You literally make bowls of cookie batter and stick them in the fridge, just waiting for chocolate chips to come in. As soon as they do, you can sell some cookies to those that have put their name on the waitlist.
Not only are chocolate chip prices higher, affecting all markets which include chocolate chips, but your bakery can’t sell chocolate chip cookies… a mess
So, this story is fictional, but if I changed some of the words above, we get a true story. Here is what should be changed:
Chocolate chips --> microchips
Chocolate chip cookies --> cars
flour, sugar, butter, salt, egg, vanilla-->car parts that I know nothing about.
Bakery--> car manufacturer (Nissan, as an example)
ice cream, cakes, brownies, bread, cheesecakes, cannoli’s, pecan bars, muffins, etc., etc. --> computers, video games, tablets, headphones, etc. etc.
factory strike –> shut down for covid concerns
freeze -->freeze (ha – this one didn’t change, surprisingly)
I won’t repeat the whole thing, but as a summary, here is what is going on in the car market and how it relates to microchips:
Car manufactures saw a decrease in demand for cars at the beginning of COVID. Because of this decrease in demand and uncertainty of how long it would last, they decided to buy fewer microchips (a key component of modern cars).
Meanwhile, the demand for microchips globally went up as people were working and going to school online and needed more computer equipment (which also requires microchips). Purchases of medical equipment and cell phones using microchips were also up. (WSJ article)
To top it off, factories for microchips had to temporarily halt production because of COVID concerns. Plus, there were some factories over the past year that had weather related issues (such as the Texas freeze… which I experienced and was certainly the coldest I’ve ever been in Texas) (Techxplore).
Prices of microchips, and those goods that include microchips are up. “HP has raised consumer PC prices by 8% and printer prices by more than 20% in a year, according to Bernstein Research.” (WSJ article)
Even as demand started to increase for microchips, increasing production is not instantaneous. This one article says it takes 3 to 4 months to make a semiconductor chip. (The Guardian)
So how does this affect car companies? Some literally have new cars built and ready and waiting for microchips to be added. Most have had a huge decrease in cars sold this year as a result of the shortage (Car and Driver).
If you're planning on buying a car, a computer, a printer, etc. then you might be paying higher prices!
Sidenote: I can't believe I'm still writing posts about covid...
I've already posted my three favorite chocolate chip cookies.
The most traditional (but 10x better than tollhouse) was in the post "The Magic of Chocolate Chips"
The secretly vegan cookie which I think is amazing can be found in this post discussing supply curves: "Supply Curve of Chocolate Chips"
Finally, the shortbread chocolate chip cookie found in the post "Nobel Prize, RCTs, and Cookies in Class" is amazing.
But, for this post I tried a new recipe: Triple Chocolate Chip Cookies from Sallys Baking Addiction. Instead of using semi-sweet chocolate chips, white chocolate, and snow caps, I used dark chocolate chips along with the white chocolate and snow caps. They are delicious. But, remember, never over bake your cookies! Also, a lesson I learned: snow caps are not on the baking aisle, look for them with other boxed candies on the candy aisle.
Thanks to Peter Kotrodimos (@PeteTheGreek95) who sent me the WSJ article on Twitter!