25 JulymIce cream company Klondike has discontinued one of its popular novelty ice cream treats, the Choco Taco. Fans were disappointed. The Choco Taco has been a staple of Klondike’s offerings for nearly 40 years now. By all accounts, the product was popular and profitable. So why the decision to close it on behalf of Klondike? Economics helps us understand why.
The official statement from Klondike reads:
“Klondike Choco Taco has unfortunately been discontinued in both 1ct and 4ct pack sizes. Over the past 2 years, we have experienced an unprecedented increase in demand across our portfolio and have had to make very difficult decisions to ensure availability of our entire portfolio nationwide. A necessary but unfortunate part of this process is that We sometimes have to discontinue products, even a favorite item like the Choco Taco.”
Firms, like all economic actors, face scarcity. They only have so many resources (labor, capital, etc.) and must decide how to deploy those resources in the most efficient 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: what you have to give up in order to take an action cost. If Klondike wishes to produce a Choco Taco, cost Choco Taco means the monetary value of the inputs and any products that can be made with those inputs in return. In other words, if Klondike has to choose between a Choco Taco or a Klondike bar, the cost of producing a Choco Taco is the input and the price of a Klondike bar.
The economic understanding of costs, including what one has to give up, helps us understand another key economic concept: economic profit. When people hear the word “profit,” they think of accounting profit: financial revenue minus financial expenses. But profit in economics has a broader concept. Economic profit is total revenue minus total cost. In the example above, the Klondike bar is included in the “total cost” for a choco taco. If the cost of a Klondike bar (as measured by the previous revenue of a Klondike bar if it were produced instead of a Choco Taco) is sufficiently high, then the Choco Taco may be negative profit
Indeed, this is what Klondike’s statement implies: As demand for all their products increases, the price of the choco taco rises: other products, potentially generating higher revenue, are sacrificed to make one choco taco. In order to maximize their profits, Klondike decided to close Choco Taco. Although Choco Taco was earning accounting profits, economic profits turned negative. Companies can increase their profits by allocating resources to slightly more profitable items. My friend and co-author Nathan Goodman quipped to me: “What would you do for a Klondike bar? Obviously divert scarce resources from the production of choco tacos.”
Choco Taco may be back. Costs in economics are subjective: they depend on circumstances and viable options. Another firm may purchase the rights to manufacture the product from Klondike. Some offers are apparently already in place (although it’s less clear how serious those offers are). Or, if the cost of producing a choco taco falls (ie, the value of the previous Klondike bar falls), it may return. Either way, the firm is run as if by an invisible hand creating products that people value more.
John Murphy received his PhD in economics from George Mason University and is an instructor at Western Carolina University.