Recall that all factors, particularly capital, are variable in the long-run. Entry into or exit from the industry by firms of the same size as existing firms. We analyze the effect of changes in the size of individual firm capital through the concept of economies of scale. Economies of scale (increasing returns to scale) occur when a % increase in all factor inputs causes a greater % increase in output. Suppose that 5 units of labour and 3 units of capital produce 100 units of output but that 10 units of labour and 6 units of capital produce 250 units of output. => 100% increase in factor inputs produces a 150% increase in output. Definition: diseconomies of scale (decreasing returns to scale) occurs when a % increase in all factors causes a smaller % increase in output. Definition: constant returns to scale occurs when a % increase in all factors causes the same % increase in output.