In the example in Table 7-1, we represented economies of scale by assuming that the labor input per unit of production is smaller the more units produced; this implies that at a given wage rate per hour, the average cost of production falls as output rises. We did not say how this production increase was achieved—whether existing firms simply produced more, or whether there was instead an increase in the number of firms. To analyze the effects of economies of scale on market structure, however, one must be clear about what kind of production increase is necessary to reduce average cost. External economies of scale occur when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm. Internal economies of scale occur when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry