Short definition: Marginal cost is the increase in total cost that arises from producing one additional unit of a good or service.
Explanation: It represents the change in total cost when output is increased by one unit. Marginal cost is a crucial concept in economics and business decision-making, as it helps companies determine the optimal level of production and pricing.
Example: If a company produces 100 units of a product at a total cost of $500, and producing 101 units increases the total cost to $505, the marginal cost of producing the 101st unit is $5.
Additional information (optional): In the short run, marginal cost typically decreases initially due to economies of scale, but eventually increases as production capacity becomes constrained. Understanding marginal cost allows businesses to identify the point where the cost of producing an additional unit exceeds the revenue it generates, helping them make informed production and pricing decisions.