What does marginal cost represent in production?

Marginal cost represents the additional cost incurred when producing one more unit of a good or service. This concept is crucial for understanding decision-making in production, as it helps firms determine the optimal level of output. When a company considers increasing production, it examines whether the revenue generated by the additional unit exceeds the marginal cost of producing that unit. If the revenue surpasses the marginal cost, it can be beneficial to produce that extra unit.

Understanding marginal cost is essential for effective resource allocation. When a firm produces at a level where marginal cost equals marginal revenue, it maximizes its profit. The focus is on the change in cost associated with increasing production by a single unit rather than the total costs or average costs, which encompasses broader financial considerations.