Marginal costs refer to the additional expense incurred when producing one more unit of a good or service. This concept is crucial in economics, as it helps businesses determine the optimal level of production. By analyzing marginal costs, companies can decide whether increasing output is financially beneficial. Understanding marginal costs allows firms to set prices effectively and maximize profits. If the price of a product exceeds its marginal cost, producing more can lead to increased earnings. Conversely, if the marginal cost surpasses the selling price, it may be wise to reduce production to avoid losses.