Marginal cost
Marginal cost is the cost of producing one additional unit of output.
The cost that should drive most decisions is not what you have already spent but what the next unit costs. That is marginal cost.
Marginal cost is the cost of producing one additional unit of output. It captures the extra resources consumed by making one more, and it is the figure that, set against marginal revenue, determines how much a firm should produce.
The rule that maximises profit
A firm maximises profit by producing up to the point where the cost of the next unit equals the revenue it brings in. While an extra unit earns more than it costs to make, producing it adds to profit; once it costs more than it earns, producing it subtracts. So the simple discipline of comparing marginal cost with marginal revenue, rather than staring at averages or totals, drives the central production decision.
Why it differs from average cost
Marginal cost and average cost are easily confused and often diverge sharply. A software firm may spend a fortune building a product, so its average cost per copy is high, while the cost of one more download, the marginal cost, is almost nothing. Industries with high fixed costs and low marginal costs behave very differently from those where each unit costs nearly the same, and pricing that ignores the gap goes badly wrong.
Pricing at the margin
Because the marginal cost is what an extra sale truly costs, it sets the floor below which selling loses money on each additional unit, at least in the short run. This is why firms with near-zero marginal costs, in digital goods especially, can rationally give away copies or price very low, and why understanding marginal cost is essential to sensible pricing rather than ruinous discounting.
Marginal cost embodies the economist's habit of thinking at the edge. Sunk and average figures describe the past and the whole; the marginal figure describes the only thing a forward-looking decision can change, which is whether to do a little more or a little less.