Microeconomics Individual Assignment

MAC is a Canadian based makeup company that has been first established by two people Frank Toscan and Frank Angelo. The company was first launched in the year 1984 in Toronto (Circus, 2013), producing what is really famous in the market for women, cosmetics. Many other cosmetic producers also manufacture skincare products, providing a variety of choices in the market, meanwhile MAC chooses to keep branding in colors. Since they kept this characteristic of their branding they have managed to preserve their buyers by pleasing them with almost the same satisfaction for every unit of MAC bought. This creates a stable market for MAC as prediction for the future sales are easy to predict. As MAC’s industry is based on a market economy, different cosmetic firms are allowed to decide individually in what to produce, how to allocate the resources and how are goods distributed, this leads to a competitive market where productivity of output and input will rise.

In the past MAC has had their downside due to the lack of standard procedure when compared with its rivals, until another makeup brand Estee Lauder bought over the company and placed MAC in an emerging market in the economy. Once MAC has stepped into the market, Estee lauder then directed it to other makeup brands such as Clinique and Aveda, where it has lead to being the biggest play for the corporation, in terms of market development today (Coleman-Lochner, 2013).

Diagram 1 will show you the change that Estee Lauder has given for MAC’s demand after its change in the economic structure.

(Diagram 1)

What Estee Lauder saw in MAC was the potential in the long-run profit maximization in their perfectly competitive market, to eliminate any economic loss or profit MAC’s entry to the market has made it more competitive as the brand is well known for its colors to complement different types of skin tones. Due to the perfect competition in the market for makeup, it has created a perfectly elastic demand for MAC as consumers have other options as their substitute good.

MAC’s product can either be considered as a normal or a luxury good in the market for women, as the price for one unit of good from MAC is not relatively cheap for all consumers. Even so, the price elasticity of demand for MAC’s products is still relatively inelastic, this is caused by their adjustment in the short-run production, expanding their marginal social benefit by having products supplied in a limited quantity, the industry also focuses in branching out into other sources, for example opening multi national stores worldwide in order to be able to introduce themselves into new environments and still make comfortable profits. Overall Estee lauder’s market strategy is prioritizing their investment by capitalizing and exercising greater financial discipline and operates in a closer aligned manner across business units and borders (Joines, 2013). The global sales rate for MAC has doubled since the year of 2008, even if they are encountering economical problems they still maintain their multi channel and multi branding strategy, which is their overseas retail establishment and their online shops.

One of the main problems that MAC cosmetics is facing is the lack of supply of their products that they are providing for the society, where in the other hand their promotion system is creating a bigger demand in the market. MAC’s promotion strategy is mostly based on having collaboration with international artist or international role models, producing limited edition goods with them. Because the quantity demanded is higher than the quantity supplied this leads to a higher search productivity among the buyers, which also increases the activity of small business that sells MAC cosmetic products outside the retail shops. Buyers in the market are willing to pay for a higher price for each unit of MAC’s products from unofficial sellers due to the scarcity they’re facing. 

( MAC x Rihanna)
Other firms also sees this issue as an opportunity to make business by using the technology resources they have to produce counterfeit MAC cosmetic products that will be sold at a lower price in the black market.  Although MAC has tried to alter this problem by putting a lawsuit against the illegal sellers, technology factors are still allowing illegal sellers to produce more counterfeit MAC cosmetics & the demand for this products is still rising as this attracts buyers with a lower income who finds that the authentic MAC cosmetic products as a luxury good rather than a normal good.

As MAC is famed for having cosmetic colors that blends in perfectly for the skin, they are well known in the African- American women society, where it is harder for them to find cosmetic products that suits their skin. This is a big advantage for MAC in the competitive market as a big portion of American African women chooses MAC cosmetic over other brands. Seeing this trend in their business has led the MAC industry to expand in South Africa, they have also entered the fast emerging growing markets in Brazil, Turkey and India. MAC also have preserved their hotspot since 2000, opening their branch in south Africa continuing to open up 24 retail shops within 8 cities since then. This is a hot spot for MAC as the sub- Saharan Africa is experiencing the second fastest growing economy in the world (Business Day Live, 2013).
MAC’s firm sees this as a big prospect ahead and has decided to double up the presence of their stores in the next 3 years over South Africa. A demographic factor has also help MAC to achieve their future goals, because 70% of the population in the sub-Saharan Africa is below 30 years old, allowing MAC to be more recognized by the female population group. One of the steps to success MAC is taking to improve their business in the emerging market is the use of E-commerce, (electronic commerce) which is their fastest growing channels worldwide. Although E-commerce is helping MAC with their sales slower in Africa than any other parts of the world, they have decided to concentrate more in making the people aware of the brand rather than gaining revenue in a small quantity without getting noticed by the people.

  

(Diagram 2)

As we see from diagram 2, we can determine how MAC has structured their long-run profit maximization, where they tend to keep the demand the same as their average revenue and also the same with their marginal revenue. This is the curve that shows their elastic demand in the short run in a perfect competition. MAC is trying to maximize their profit and avoid losses in the competitive market, when the market price of cosmetics is higher than the average total cost of the production this will cause new firms to enter the market and causing an increase of supply in cosmetics in the market, which will lead to a fall in price for MAC’s cosmetic products. In the other hand if price is less than the average total cost, the firms are then supporting the losses for the industry, therefore as firms leave the industry this will lead to a decrease in total supply produced, leaving price equal to the total average cost.

As we see from the graph above, Estee lauder has encountered an unexpected increase in their total net revenue, when calculated Estee lauder earned about $94 million from their orders. It is said that Estee lauder has gained a satisfying profit from their makeup division, including MAC. If this is to be plotted in a PPC graph (Production Possibility curve), the point where the actual output lies will shift towards the potential output.

Overall Estee lauder finds it most struggling when competing in the cosmetic industry throughout Europe, where the market is most competitive. Other European cosmetics brand has merged into the market vastly, creating a perfectly elastic supply of cosmetics in the European market. Even so Estee lauder maximizes their gain in sales by expanding their industry in Asian countries such as Thailand and Australia, where the demand for MAC cosmetic is higher than the European countries.

(1534 words)

Sabrina Lubis Jensen 0315872

Refrence List:

1.     Circus, C. 2013. MAC Cosmetics - Our History. [online] Available at: http://www.maccosmetics.jobs/mac/our-history.html [Accessed: 14 Oct 2013].

2.     Coleman-Lochner, L. 2013. With M.A.C., Estée Lauder Enters Emerging Markets. [online] Available at: http://www.businessweek.com/articles/2013-03-21/with-m-dot-a-dot-c-dot-est-e-lauder-enters-emerging-markets [Accessed: 16 Oct 2013].

3.     Joines, H. 2013. Mac cosmetics. [online] Available at: http://www.slideshare.net/monelli_fastidiosi/mac-cosmetics-9263585 [Accessed: 16 Oct 2013].

4.     Business Day Live. 2013. Cosmetic firm MAC to open 20 stores in Africa. [online] Available at: http://www.bdlive.co.za/business/retail/2013/10/07/cosmetic-firm-mac-to-open-20-stores-in-africa [Accessed: 17 Oct 2013].

5.     Sloman, J., Wride, A. and Garratt, D. 2012. Economics. 8th ed. Italy: pearson.

6.     Coupon, M. 2013. Get MAC, Covergirl, Sephora cosmetics samples, gift cards and coupons for FREE. [online] Available at: http://freemaccoupon.com [Accessed: 17 Oct 2013].

7.     Makeup.Com, M. 2013. Mac Makeup.com. [online] Available at: http://macupdate1.blogspot.com/2013/07/mac-makeupcom.html [Accessed: 17 Oct 2013].