Increasing returns to scale are caused by some advantages that the expansion in scale of operations confers on the larger enterprises. These advantages are collectively known as the economies of scale. Economies of scale – both internal and external – refer to those advantages which accrue to the firms and industry, with the expansion in the scale of production. Internal economies are those advantages which are special to each firm, depending upon the size of different production units. External economies, on the other hand, are those advantages which are general and common to all the firms irrespective of their individual size.
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