What Would You Do For a Klondike Bar?
On July 25th, the ice cream company Klondike discontinued the Choco Taco, one of their popular novelty ice cream treats. Fans were disappointed. The Choco Taco has been a staple of Klondike’s offerings for almost 40 years now. By all accounts, the product was popular and profitable. So why the decision from Klondike to discontinue it? Economics helps us understand why.
The official statement from Klondike reads:
Firms, just like all economic actors, face scarcity. They only have so many resources (labor, capital, etc.) and they need to decide how to deploy those resources in the most effective manner. When resources are used to produce one item, they cannot be used to produce a different item. Thus, we have the economic understanding of cost: whatever you must give up in order to take an action is the cost. If Klondike wishes to produce a Choco Taco, the cost of the Choco Taco is the monetary price of the inputs plus whatever product could have been produced with those inputs instead. In other words, if Klondike has to choose between the Choco Taco or a Klondike Bar, the cost of producing the Choco Taco is the price of inputs plus one Klondike bar.
The economic understanding of costs as including what one has to give up helps us understand another key economic concept: economic profit. When people hear the word “profit,” they tend to think of accounting profit: monetary revenue minus monetary costs. But economics have a broader conception of profit. Economic profit is total revenue minus total costs. The Klondike Bar in the example above is included in “total costs” for a Choco Taco. If the cost of a Klondike Bar (measured by the foregone revenue of the Klondike Bar if it was produced instead of the Choco Taco) was sufficiently high, then the Choco Taco could have negative profits.
Indeed, it appears this is the case given Klondike’s statement: As demand spiked for all of their goods, the cost of the Choco Taco rose: other goods, potentially earning higher revenue, were sacrificed to produce a Choco Taco. In order to maximize their profit, Klondike decided to discontinue the Choco Taco. Even though the Choco Taco was earning accounting profit, the economic profit turned negative. The company could increase their profit by allocating resources to the marginally more profitable items. As my friend and co-author Nathan Goodman quipped to me: “What would you do for a Klondike Bar? Shift scarce resources away from production of the Choco Taco, apparently.”
The Choco Taco may return. Costs in economics are subjective: they depend on the situation and viable alternatives. Some other firm may purchase the rights from Klondike to produce the product. Some offers are apparently already out there (though it is less clear how serious those offers are). Or, if the costs of producing the Choco Taco fall (that is, the value of the foregone Klondike Bar falls), it may come back. Either way, the firm is led as if by an invisible hand to produce goods that people value more highly.
Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University.