Friday, August 21, 2009

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

According to the August 21, 2009 article "Analysts: Without price cuts, Wii could be in trouble," Ben Silverman reports a change in the price of the Playstation 3 gaming system will affect the market for the Nintendo Wii game console. Will this decrease in the price of the Playstation 3 cause (a) an increase in the supply of the Nintendo Wii, (b) a decrease in the supply of the Nintendo Wii, (c) an increase in the demand for the Nintendo Wii, or (d) a decrease in the demand for the Nintendo Wii? Read the article and then illustrate the change in the market for the Nintendo Wii with a graph that shows the initial positions of the supply and demand for the Nintendo Wii and the new positions of the supply and demand curves. (Hint #1: Only one of the curves has shifted. Hint #2: Does a change in the price of a substitute good affect the supply or demand for a product?) There is a link at the bottom of this posting that provides the answer.
Thanks to months of rumors, Sony might not have shocked the gaming world by finally dropping the price of the Playstation 3 last week. But with a fresh, $299 model en route to retailers, they've certainly changed the face of the console war.

And according to multiple analysts, the company with the most to lose is none other than Nintendo and its market-leading Wii.

Game site Gamasutra checked in with a group of industry experts to get a glimpse into the post-PS3 price-cut future. The consensus? At $299, both the Xbox 360 and the PS3 are in perfect position to make some serious gains on Nintendo's Wii, which is the only system yet to see a price cut and is currently available at the suddenly not-so-bargain price of $250.

"I think that they may see sales suffer, and certainly will see sales down year-over-year," says oft-quoted Wedbush Morgan analyst Michael Pachter. "So we have to see if they cut, unbundle and cut, or rebundle (with Wii Sports Resort plus Wii Motion Plus). They’re hard to figure out."

His thoughts were echoed by Kaufman Bros. Todd Mitchell, who notes that Nintendo is "struggling to keep the Wii relevant."

Jesse Divnich from EEADR concurs. "While the target audience for the two platforms varies greatly, some consumers will face a tough decision to purchase the Wii with outdated processing power or the PlayStation 3 with a built-in Blu-Ray player," he says.

Earlier this month, however, Nintendo boss Satoru Iwata insisted that a Wii price cut simply wasn't on the radar, leaving consumers to wonder exactly what Nintendo is planning to do to combat the gains made by its rivals.

Whatever they do, they’d better do it quickly. Based on a chart-topping flood of pre-orders on both the US and UK versions of its site, Amazon is already warning consumers to expect shortages of the forthcoming PS3 Slim and has limited sales to one per household.


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