You can't even build a scientific calculator with BASIC language support for 10 bucks. Even if the power is "cheap", there are still costs you can't cut off. And it's not some chinese bootleg console, people are expecting a good build quality, a glitchy (even mini) console would be terrible press for Sony.
There are also marketing, research, distribution and publishers' royalties costs and accessories to account for. Manufacturing cost isn't everything. It's extremely cheap.
Sure. Its 500 bucks to make. Sony is just being sweethearts...