What is meant by "marginal cost"?

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 as it helps businesses and producers make informed decisions about production levels. Understanding marginal cost allows firms to evaluate whether the cost of manufacturing another unit is justified by the potential revenue that the additional unit could generate.

By focusing on marginal cost, businesses strive to achieve optimal production, maximizing efficiency and profit. For instance, if the marginal cost of producing an extra unit is less than the marginal revenue gained from selling that unit, it is economically beneficial to increase production. This principle aids in determining the balance between the costs of production and the revenues from sales, ensuring producers do not exceed a cost-benefit threshold.

Other options present concepts that do not align with the definition of marginal cost. Average cost relates to the cost spread over all units produced, revenue deals with income from sales rather than production costs, and opportunity cost focuses on the value of the next best alternative foregone, which is separate from the idea of marginal cost. Understanding marginal cost is vital for making effective production decisions, highlighting the relevance of this economic concept in real-world scenarios.