External economies and diseconomies of scale

Internal economies and diseconomies of scale occur when a firm grows and changes in scale and size.

By contrast, external economies of scale occur when a firm's average or unit costs of production fall, not because of the growth of the firm itself, but because of the growth of the industry or market of which the firm is a part. Very often, external economies of scale are produced by cluster effects, which occur when a lot of firms in the same industry are located close to each other, providing markets,…