Andreas Savva 6A
Evaluate the likely effects of growth in the scale of a business on costs and profits. Illustrate your answer
with an appropriate diagram.
A profit is the difference between revenue and costs. In this case, it is also worth mentioning that a
takeover is taking place since Coca Cola is buying Costa Coffee. It is controversial whether this takeover
will lead to costs or profits for Coca Cola.
On the one hand, Coca Cola will experience economies of scale because of external growth. External
growth will enable the business to scale
up the size of the business and in turn,
enjoy Economies of Scale. Economies of
Scale are a fall in the long run average
costs of production as output rises. As it
can be seen in the graph, the LRAC is U-
shaped because of how long run AC
would behave. The diagram illustrates
how at first, the LRAC falls, showing
economies of scale. It is important to
also remember that some firms could
become too large and their AC would
begin to rise and lead to Diseconomies
of Scale. In this case, the Costa Coffee
takeover by Coca Cola would enable the
new combined business to benefit from
economies of scale. This would lead to a reduction in per unit cost as the average costs of the firm
decrease from economies of scale. If we assume that the C1 point on the diagram was the cost prior to
the takeover and C2 is the cost after the takeover, we can see how Coca Cola would benefit from lower
costs due to the economies of scale that would arise from the takeover, highlighting the effects of
scaling up the business on its costs. Adding onto that, as firms expand in size and output, their long-run
average costs tend to fall and this would cause different internal economies of scale to arise that can be
enjoyed by Coca Cola following the takeover. These marketing, managerial and financial economies of
scale. When it comes to marketing economies of scale, since the cost of advertising is the same, the
higher the sales, the lower will be the unit costs. This means that since the newly joined Costa-Coca Cola
would make a large amount of units, the average costs for marketing will be lower. This means that
large firms such as this one are able to enjoy the lower AC from marketing operations. Furthermore, in
regards to the managerial economy, since Coca Cola would have access to the staff of Costa as they have
taken them over, they are able to use specialists such as accountants, lawyers and others for greater
efficiency which would ultimately lower average costs. In contrast to a big firm like Coca Cola, a small
firm does not employ specialist staff as it represents an indivisibility. This is because a small firm cannot
afford to employ a specialist manager to carry out marketing tasks only and they will have to carry out
other functions and would lower efficiency as they might not be experts in those functions. Whereas,
Coca Cola has that ability since it is a large firm. This illustrates how the Costa takeover would lead to
internal economies of scale which would lower LRAC for Coca Cola. Therefore, the likely effect of Coca
Evaluate the likely effects of growth in the scale of a business on costs and profits. Illustrate your answer
with an appropriate diagram.
A profit is the difference between revenue and costs. In this case, it is also worth mentioning that a
takeover is taking place since Coca Cola is buying Costa Coffee. It is controversial whether this takeover
will lead to costs or profits for Coca Cola.
On the one hand, Coca Cola will experience economies of scale because of external growth. External
growth will enable the business to scale
up the size of the business and in turn,
enjoy Economies of Scale. Economies of
Scale are a fall in the long run average
costs of production as output rises. As it
can be seen in the graph, the LRAC is U-
shaped because of how long run AC
would behave. The diagram illustrates
how at first, the LRAC falls, showing
economies of scale. It is important to
also remember that some firms could
become too large and their AC would
begin to rise and lead to Diseconomies
of Scale. In this case, the Costa Coffee
takeover by Coca Cola would enable the
new combined business to benefit from
economies of scale. This would lead to a reduction in per unit cost as the average costs of the firm
decrease from economies of scale. If we assume that the C1 point on the diagram was the cost prior to
the takeover and C2 is the cost after the takeover, we can see how Coca Cola would benefit from lower
costs due to the economies of scale that would arise from the takeover, highlighting the effects of
scaling up the business on its costs. Adding onto that, as firms expand in size and output, their long-run
average costs tend to fall and this would cause different internal economies of scale to arise that can be
enjoyed by Coca Cola following the takeover. These marketing, managerial and financial economies of
scale. When it comes to marketing economies of scale, since the cost of advertising is the same, the
higher the sales, the lower will be the unit costs. This means that since the newly joined Costa-Coca Cola
would make a large amount of units, the average costs for marketing will be lower. This means that
large firms such as this one are able to enjoy the lower AC from marketing operations. Furthermore, in
regards to the managerial economy, since Coca Cola would have access to the staff of Costa as they have
taken them over, they are able to use specialists such as accountants, lawyers and others for greater
efficiency which would ultimately lower average costs. In contrast to a big firm like Coca Cola, a small
firm does not employ specialist staff as it represents an indivisibility. This is because a small firm cannot
afford to employ a specialist manager to carry out marketing tasks only and they will have to carry out
other functions and would lower efficiency as they might not be experts in those functions. Whereas,
Coca Cola has that ability since it is a large firm. This illustrates how the Costa takeover would lead to
internal economies of scale which would lower LRAC for Coca Cola. Therefore, the likely effect of Coca
