Define marginal cost in the context of production.

Marginal cost refers to the additional cost incurred when producing one more unit of a product. It represents the change in total cost that arises from the production of that extra unit. Understanding marginal cost is crucial for businesses as it helps them make decisions about scaling production up or down based on profitability.

By analyzing the marginal cost, a company can determine whether it is cost-effective to increase production; if the price at which the additional unit can be sold exceeds the marginal cost, it is typically advantageous to produce that unit. Conversely, if the marginal cost exceeds the selling price, production may be less desirable.

In this context, the other definitions do not align with the concept of marginal cost. Total cost refers to all expenses, average cost considers the cost spread across multiple units, and the cost saved by reducing production levels does not apply to additional unit production. Consequently, understanding marginal cost is essential for effective production management and financial strategy.