The economics of slushies
How is it that a little cup of brightly colored, flavored ice can cost $3?
"That's quite a markup," remarked my father as he paid for my six-year-old son's treat after a soccer game. "Three dollars for a cup of ice."Skip to next paragraph
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It's true; the price tag did seem steep at first. But as we analyzed the situation more carefully — my father is also a fan of free markets — we realized that there was no reason to be outraged at the vendor's price.
Before speculating on the ins and outs of the frozen-drink market, let me give the background. My son plays soccer for a town league. Every Saturday, the teams all play each other at one central location, with at least 20 little fields set up for the various age brackets. During the course of the day, I'd guess that at least a thousand people (counting spectators) cycle through the fields.
During Easter weekend my parents were visiting, and we all went to my son's game. My son pointed out with enthusiasm a truck that was parked in a very accessible area, because it housed ice drinks. (I think technically they were not the ICEE brand, but it was the same idea.)
After my son's team absolutely blew out their opponents, I suggested to my son that if he asked nicely, Grandpa would probably buy him a treat at the truck. And now I have brought all readers up to speed from where our story first began. …
How Could Somebody Charge $3 for a Cup of Ice?
As a card-carrying armchair economist, I did not conduct any actual research for this article. Nevertheless, it may interest some readers to learn how to think like an economist on such everyday puzzles.
Factors on the Demand Side
The first important point is that my father voluntarily paid the $3 for the refreshment, albeit with some significant social pressure leaning on him after the promise made to my son. But if, for example, he had gotten to the truck and the sign said each frozen drink cost $30, my father clearly would have walked away. We could've told my son that it was too much money, and that we'd stop at a convenience store instead.
We already have more insight into the "high" price of the drinks — their extremely convenient location. An ice-cold-drink-at-the-store is not the same good as an ice-cold-drink-next-to-the-soccer-field. There is nothing irrational or "uneconomical" about consumers being willing to pay more for the immediate quenching of their thirst.
Although I obviously didn't think it through at the time, I realized in retrospect that when I suggested to my son that my dad would buy him the treat, I knew that the price had to be "reasonable," because the truck had obviously been at the games before (since my son recognized it), and because I could see a crowd of people in front of it.
These considerations shed some light on the "demand side" of the equation. Especially because it was a hot day, it's no mystery that so many people were willing to exchange $3 for a "cup of ice."
Factors on the Supply Side
Now let's look at the supply side. In general, if we're trying to understand why a price might be high, it's not enough in economics to explain that people really value something. We need to go further, and explain why the quantity supplied stays low enough so that what's called the "marginal utility" of the small number of units remains high.
Let me clarify with a different example. If someone were selling bottles of water at $100 a piece, we could explain that by saying that the consumers valued each bottle more than the other goods and services that could have been obtained with the $100. However, because that price is so unusually high, we would want to explore the situation more in order to figure out why more bottles weren't being channeled to these particular consumers, who were obviously on the verge of dying of thirst.
By the same token, we can speculate on the "supply side" of our frozen drink supplier, to see if the apparently high price of $3 really isn't so surprising after all.