What does "marginal cost" refer to in economics?

Marginal cost refers specifically to the additional cost incurred when producing one more unit of a good or service. This concept is crucial in economics and helps businesses determine the optimal level of production. By analyzing marginal costs, businesses can decide whether the potential revenue from selling one additional unit exceeds the cost of producing it. If the marginal cost is lower than the price at which the product can be sold, it typically indicates that increasing production could be beneficial for the business's profitability.

Understanding marginal cost also plays a significant role in pricing strategies and economic decision-making, such as identifying the point at which production becomes less profitable or determining whether to increase or decrease production levels. Therefore, recognizing marginal cost is essential for effective resource allocation and financial planning within a business context.