What does "marginal cost" refer to?

Marginal cost refers specifically to the additional cost incurred when producing one more unit of a product. This concept is pivotal in decision-making regarding production levels. It helps managers and businesses determine whether increasing output will lead to a profitable outcome. Understanding marginal cost allows businesses to analyze how costs change with output levels and make informed choices on pricing, production, and resource allocation.

In contrast, the other options represent different cost concepts: raw material costs are part of the overall production costs but do not specifically account for changes associated with increased production levels. Average cost is calculated by dividing total costs by the number of units produced, providing an overall cost perspective rather than focusing on the impact of producing an additional unit. The total cost divided by the number of units produced gives a broad view, but doesn't examine the incremental costs associated with increasing production. Therefore, recognizing that marginal cost reflects the cost of one additional unit emphasizes its role in production and pricing strategies.