In the making of a Watch, If one Man shall make the Wheels, another the Spring, another shall Engrave the Dial-plate, and another shall make the Cases, then the Watch will be better and cheaper, than if the whole Work be put upon any one Man. We shall take up each of these factors briefly at first, then in more detail. A bigger population implies a bigger market, all else equal. A bigger market promotes bigger manufacturing plants that likely are more efficient than smaller ones, as well as longer production runs and hence lower setup costs per unit of output. Adam Smith emphasized the importance of the division of labor and used the famous example of pinmaking.
Specialization can also occur with respect to machinery.
If the market for a firm's goods is small, it will buy multipurpose machines that can be used in the production of several kinds of products. If its market is larger, the firm can afford to buy more efficient specialized machines for each operation. Larger markets also support a wider variety of services. If population is small, there may be too few people to constitute a profitable market for a given product or service. In such a case there will be no seller, and people who need the product or service will suffer by not being able to obtain the good they want.