Consider a market transaction that you have undertaken as a consumer which was notable because it is particularly recent, large or unusual - Market Transaction introduction. Analyse this transaction from a micro-economic standpoint. I recently entered a sector of the home entertainment market by purchasing a Playstation 3. The Playstation 3(PS3) is Sony Computer Entertainment’s third video game console which competes in the current seventh generation of consoles alongside Microsoft’s Xbox 360 and Nintendo’s Wii.
With the advancement of new technologies such as high definition(HD) and motion sensors it was only natural that consoles would evolve to incorporate these new breakthroughs. The first seventh generation console to be released was Microsoft’s Xbox 360 on November 22, 2005 which introduced HD gaming. With this unique selling point Microsoft began to gain an increase in market share that threatened Sony Computer Entertainment’s current dominance over the market that was due to the success of the Playstation 2.
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In order to compete with Microsoft’s new console and retain their lead in market share Sony developed the PS3 which included their own unique selling point, the Blu-ray disc player, with hopes that this new feature would synergise well with the growing popularity of Blu-ray DVDs at the time as a complimentary good and attract customers to their product over Microsoft’s Xbox 360.
This was one of many factors that influenced my decision to purchase a PS3 including others such as a rise in personal income that allowed me to enter into this luxury good market and also the utility provided by a PS3 that in effect offered me the services of a multitude of different products combined into one. Also due to economies of scale and reduction in raw material costs, Sony has managed to reduce the manufacturing cost of producing PS3s over time which allowed them to cut the retail price making them even more competitive against other substitute products.
The PS3 was first released on November 11, 2006. However it took nearly 6 years before I entered the market and considered purchasing this product. This delay between release and interest in the product can be partially explained by looking at the law of demand which states ‘(All else being equal) as prices rise, demand falls’. Upon release the PS3’s recommended retail price was $499. Over the years this has been dropped down to $250 and with regards to the above law this should mean demand rises. If we look at sales figures we can see that in the first financial year of release only 3. million* units were sold, but in the financial year of 2011 this figure has increased to 13. 9 million* units.
Obviously external factors which we will look at shortly such as the price and range of complimentary goods will have an effect on these figures but from a purely micro-economics standpoint the demand law holds true. As I said before, other factors will have an effect on the supply and demand of this product. By looking at a graphical representation we can clearly see how some of these factors will affect the price of the product.
Here is a supply and demand graph. Where the two blue lines meet is the point at which markets clear (Demands meets supply at given price). Let’s look at the pervious example and explore the effects changes to complimentary goods will have. * If complimentary goods decrease in price we can expect demand for the product to increase. This will result in the demand line shifting to the right. * In the same breath if complimentary goods increase in price we can expect demand to fall resulting in the demand line shifting to the left.
As we can see from the new graph to the left if demand were to increase and supply remain the same then the price of the product will increase. The opposite can be said if demand were to fall. We’ve shown what might happen to the price of a PS3 if demand were to change, but if take this one step further and measure how responsive demand is to changes in price we can analyse the elasticity of demand for this product. The formulae to measure the arc elasticity of demand is as follows. (Q1-Q2)/(P1-P2)*(P1+P2)/Q1+Q2) Taking the sales figures from earlier we have Q1=3. 5, Q2=13. , P1=499 and P2=250 Plugging these figures into the equation gives an answer of -1. 798. Since the value is less than one we can say that PS3s are elastic. This means that an increase in price of 1% will lead to a greater than 1% change in demand. I also predict that at the current market price this product to be elastic. This is due to the nature of the product. Being a luxury good, customers are more likely to be price sensitive and also the PS3 is against strong competition so if the price were to change in favour for or against substitute goods this is likely to have a strong effect on demand.
Therefore in this case if Sony were to increase the price of the PS3 they would expect to make lower total revenue. This is because the predicted demand for PS3s would be expected to drop more than the percentage increase in price could cover. In conclusion by looking at the recorded sales figures we can clearly see the real implications of the PS3 high elasticity at work. The high starting retail price combined with a lack of starting complimentary goods projected poor sales which were then recouped by reducing the price and an increase in complimentary goods.