Basic economics tells you that when there is an oversupply of something, you cut back on production.

It took memory manufacturers a little while to figure that out, but at least they did figure it out.

Gartner estimates that worldwide capital spending on semiconductor equipment in 2008 will be $47.5 billion, a 19.8 percent decline from 2007. Memory-related capital equipment would see a 29 percent reduction and DRAM in particular would drop by 47 percent.

Gartner cited a weakening in the U.S. economy and oversupply as the reasons for the cut in spending. “The expected bursting of the DRAM capital spending bubble has finally happened, as rampant overcapacity in that sector drove unit prices well below cash costs for most manufacturers,” said Klaus Rinnen, managing vice president for Gartner’s semiconductor manufacturing group.

Rinnen noted that the memory market spent more than 57 percent of total revenue on capital expansion, “a level which cannot be supported by the anticipated lackluster revenue growth.”

Much as I love seeing 2GB of memory at Fry’s for $50, they really needed to smarten up on pricing.