What is "marginal cost"?

Marginal cost refers specifically to the cost associated with producing one additional unit of a good or service. It is a fundamental concept in economics because it helps businesses determine the optimal level of production. By analyzing marginal cost, firms can assess whether producing an additional unit would be profitable compared to the revenue generated from selling that extra unit. When marginal cost is less than the price at which the product can be sold, it typically indicates that increasing production could lead to greater overall profits.

The understanding of marginal cost is crucial in decision-making processes for businesses as they seek to maximize efficiency and profitability in production. This concept aids in resource allocation, pricing strategies, and assessing economies of scale.

In contrast, other options illustrate different cost concepts: the total cost encompasses all expenses incurred in production, the average cost divides total costs by the quantity produced, and fixed costs represent expenses that do not change with production levels. All these aspects are important in the broader context of economics, but they do not directly define the additional costs incurred from producing one more unit, which is the essence of marginal cost.