How does heat affect system performance?

Excessive heat can kill system components and eventually you have NO performance.

Electronic devices are affected by temperature. Junction voltages change, substrate resistances change, leakages change, capacitors change in value, switching speeds change, impurity migration rates change.

Electronics devices are designed to operate over specific temperature ranges. Outside these ranges component variations are more likely to cause something to not work as it is designed. Perhaps a gate gets a bit too slow and it doesn't toggle in time. This can cause a system to hang. Parts 'wear out' quicker at elevated temperatures. Too high a temperature can cause a part to fail catastrophically.

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