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I'm going to use textiles as an example, since this is one of the first industries to be industrialized. I am going to focus on wool, since things get seriously weird when you get into things like silk.

Throughout most of the middle ages, most production of woolen cloth went like this: Villagers in England shear the sheep, they sell the surplus to a guy called a stapler, who collected the wool in bundles called staples. He'd sell to a more important stapler at a major fair, who'd sell it in a port city to a merchant who ships or sells to Holland and Belgium. 1. Female peasants with wool in England spend all their spare time spinning the wool into thread using hand distaffs they carry around attached to their belts. They sell this to a weaver or a middle man for a weaver. They weave it and sell it to a fuller, who fulls it and sells it to a dyer or a middle man for dyers, who dyes and sells it to a merchant, who sells it to people who make or have it made into clothes and stuff for the domestic market.
2. Most of the wool gets sold in Holland, where they are closer to industrialized. They often sell the wool to the weavers, who hire peasant women to spin the wool, and the system runs on much as in England, only with more people working each step. The main difference is that Holland and Belgium are way more Urbanized than England. They buy their grain in bulk from France and the HRE (Holy Roman Empire). As a result, farming is small scale and more focused towards perishables and industrial crops. The countryside isn't full of your classic peasant women trying to make ends meet with egg and thread production. They tend to hire urban woman to do the spinning. They also produce a lot of undyed fabric. They then sell the cloth all over Europe, but mostly to Italy, where the best dyes and dyers are. Most finished wool cloth is then shipped from Italy back to places like England.


In the late middle ages and early modern period, it occurred to the English that this was a losing process in the long run. This put pressure on England to develop a domestic cloth producing industry on a much larger scale. Some cities actually attempted to create incentives to domestic production. Eventually, the spinning wheel gets introduced. This meant that it became economically feasible for a weaver to set up shop with 4 or 5 spinning wheels and hire some peasant women to work full time. Or he could rent the wheels to the peasant women who could then work at home. He would then need more apprentices to help weave the thread, but could sell more cloth as a result. Some guys could afford this upgrade, others couldn't, so multiple systems end up working side by side. They were successful enough that they threw the Low Countries into a long term decline.

Wool and clothe markets are apt to fluctuate wildly, leading to boom and bust. Ironically, the flexibility of small scale production made them more competitive than you'd think. Large scale producers generally won out though. During the early modern period, the aristocracy in England decided to capitalize on the growth of demand for wool. They enclosed the commons to make room for their flocks and dispossessed peasant farmers in favor of more grazing room. This led in the short term to cyclical riots, but in the long term led to increased Urbanization as the dispossessed landed in cities looking for unskilled and semi-skilled labor job.

Textile producers were able to make use of this by hiring more labor to produce more thread, clothe, etc. to take advantage of all that extra wool, creating a self perpetuating system where economy of scales is apt to win. By the 18th century the competition was fierce and a huge portion of the British economy was tied up in various aspects of cloth manufacture. It's not surprising that people started experimenting with ways to make more cloth faster and more cheaply, since labor was still a major part of the cost. (A similar process would occur in New England at a slightly later time. Eventually it made more sense to grow sheep and weave cloth than to grow the grain in the bad soil and import expensive European cloth).

When textile mills were invented, it killed the earlier methods of hand production, since those who could afford machines could produce more fabric with cheap female labor than hand producers could. This also lead to widespread unemployment, vandalism, and riots. Eventually, the survivors got sucked into other industries which needed unskilled workers to run the machines as more industrial equipment was invented.

In short, market forces (labor, capital, supply, and demand) apply to industrialization.