Internal economies of scale relate to the firm itself (and only that firm), there can be an increase in its overall capacity or an increase in all of its factors of productions (FOPs)- this is a long term concept and requires time and planning by the firm. The sources of such an economy of scale are its physical assets, managerial style, finacial security and its power over suppliers.

Whereas an external economy of scale is the cost implications of an increase of the industry (this only applies to the pre-existing firms). This means a decrease in AC (average cost) due to specialists entering, technology, more suppliers, more finance available and FI teams.