Internal economics of scale refers to decreasing average costs as production increases due to factors within a company's control. When production increases: 1) Per unit costs fall through bulk purchasing discounts and improved bargaining with suppliers. 2) New, more efficient machines can be installed, increasing productivity and output. 3) Overhead costs are spread across more units, lowering the average cost per unit. 4) A larger scale of production allows for hiring skilled labor, better management, and efficiency gains that further reduce costs.