Decrease In Supply of Playstation2

Commentary #01 Silvia Panico

October 24, 2000

Section Covered: 01

Word Count: 436

Mike Musgrove, (10/20/00), Supply, Demand and Playstation2, Washington Post, E1-13

Decrease In Supply of Playstation2

This article entitled Supply, Demand and Playstation2, talks about a new game console which should be released in stores the 26th, October. Sony Computer Entertainment Inc. is expecting, by releasing 1 million consoles only in the United Sates, a complete sold out by the first weekend. But now, because of a missing part (supply shifter), Sony is forced to reduce that figure in half. Experts are also expecting 4 million customers in the USA who are going to want to purchase the new Playstation2 right away. Considering the two figures this Thursday, there will be a big shortage of these new game consoles.

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Sony Entertainment Inc., as mentioned in the article, will only be able to produce 500,000 consoles by this Thursday. In stores on that same day they are also expecting about four million customers, so because there will be more customers then consoles, the supply will not be able to fulfil the demand. In this case we will see a decrease in supply which will shift its curve to the left. This movement is created by the fact that the point where the Playstation2 production is now, is not included on the curve because if the supply quantity would be going down the price would have to decrease instead of remaining constant . Demand, instead, will remain constant, in fact changes in prices are included on the curve, so it will not shift. We can notice that this creates a new equilibrium point ( Fig. 1), but because Sony is not increasing its prices for each console, it will not be able to meet it. Unfortunately in this case where demand is so high, to meet that point, the price of each product will have to rise so much that it will intimidate the costumers who will not buy as many consoles, so the supply will finally equal the demand. In Fig. 1, we can notice that if the price is kept constant, the difference between the original equilibrium quantity and the new quantity formed by the shift in the supply ( shortage), is much greater than the difference produced if the price is increased. So by increasing the price, the shortage would be reduced.

In conclusion to keep the shortage as small as possible, the price of each Playstation 2 will have to rise until an equilibrium between the supply and demand curve is reached. In this case, even though the demand will not be met immediately on October 26th, Sony promises that more consoles will be produced this upcoming weekend, so that the 4 million customers will be able to purchase a Playstation2, maybe not this Thursday, but sometime in the next month. Because the production will not stop, the prices will not have to increase so much to the point where no one will want to buy the product anymore.