I always wonder how saving a few dollars in RAM pays off for the effort game developers have to make to ship games.
I mean the consoles sales are tens of millions, but I guess games titles are in the thousands and they spend a lot of money to cope with these limitations.
They actually lose money on the consoles and hope to make it back up with games. And to be totally fair, the entire 512MB was made of GDDR3.
That's right. The entire RAM bank was made of chips designed for graphics. So it's no wonder it was so expensive.
Edit: and this was necessary to decrease the latency between graphical operations and processor operations. You can load graphics directly into what is essentially VRAM, rather than having to pull it through regular RAM first. Because there is no regular RAM.
The tradeoffs made sense at that point in time, because DDR1/2 sucked a lot, and pulling data through multiple stages would drag down performance.
For the manufacturer, it really does make a difference to their bottom line. The "software tie ratio" of console games in the 360/PS3 era was modest - somewhere between 3 and 8 according to this graph [0]. Getting unit cost down matters a lot when you aren't selling a lot of additional content, and the hardware got optimized around whatever game developers could soak up the most.
As such it was conventional for game consoles to have fast-but-small RAM. The reasoning is that console games mostly bottleneck on the rendering of a scene at acceptable framerates, vs. simulating all aspects of a complex scene or achieving maximum detail as a movie would. Since ROM cartridges were fast and optical allowed data to be streamed in "fast enough", there were plenty of ways to achieve the right effect under tight RAM conditions. One exceptional case where tight RAM did not play out well is the N64's 4kB texture cache, which imposed a large burden on the entire art pipeline(if you wanted a high res texture, you had to resort to tricks like tiling it across additional geometry).
Today what is demanded from a console is much more in lock step with every other consumer device - they do more computer-like things, they can multi-task some and scenes are doing more memory-intensive things so they're more well-rounded, and get more RAM.
Interesting reading: How Naughty Dog Fit Crash Bandicoot into 2MB of RAM on the PS1 https://news.ycombinator.com/item?id=9737156