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Home | Blog | The McRib and Economic Calculation

The McRib and Economic Calculation

  • McRib
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Tags Entrepreneurship

12/09/2016

Xanthe Pajarillo has petitioned her city council to somehow get the local McDonald's restaurants to offer the McRib sandwich. The McRib features ground pork shaped like four ribs and McDonald's signature barbecue sauce. Some people love it. Others hate it.

Xanthe is in the "loves it" crowd. The sandwich is even a part of her family's Thanksgiving tradition. They order ten McRibs and a 50-piece Chicken McNugget every year.

Personal opinions about the sandwich aside, we can take Ms. Pajarillo's complaint as an opportunity to discuss why McDonald's offers the McRib sometimes but not all of the time, and in general, how entrepreneurs make production decisions for any good.

McDonald's historically reintroduces the McRib whenever pork prices fall below 65ish cents per pound. (The solid black lines below show when the McRib was reintroduced.)

McRib reintroductions and the price of pork

For McDonald's, this means weighing the anticipated demand for McRibs (which probably does not change much) and the costs of producing McRibs, which is why the per-pound pork price is an important factor. McDonald's strategy seems to be to wait for pork prices to fall before reintroducing the McRib.

All entrepreneurs are constantly weighing costs against anticipated revenues. Once the present value of anticipated revenues exceed the costs of production, the project gets a green light, whether it's a McRib or a new iPhone or a lawn mowing service or anything.

This process is a part of what makes our high standards of living possible. Without the ability to engage in economic calculation, all production decisions are just like pin-the-tail-on-the-donkey. If you can't calculate costs and revenues using market prices, then there's no way to tell if the project is one that satisfies consumers or wastes resources.

McDonalds's has decided, in the past, that it's only sufficiently profitable to produce McRibs when pork prices are at a certain level. If for some reason they are forced to continue producing McRibs when pork prices are higher, they would pull the valuable pork away from other producers who still have valuable, consumer-satisfying uses for the pork, even at the higher pork prices (think BBQ joints, delis, holiday hams, and burrito joints -- more expensive meals, higher quality pork, etc.).

This is why we shouldn't villainize profits per se. Profits mean resources are used in a consumer-satisfying way. Losses mean resources have been wasted, making everybody worse off.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source: McDonalds.com
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