Final answer:
Unit-level costs, also known as variable costs, are costs that vary with the production volume of each individual item. Fixed costs remain constant regardless of production levels, unlike variable costs which can increase due to diminishing marginal returns.
Step-by-step explanation:
Costs incurred each time a company generates one individual item of product are called unit-level costs. These are often synonymous with variable costs because they are directly associated with the volume of goods or services being produced. In the economics of production, we have fixed costs, which do not change regardless of output levels, such as rent or machinery, and variable costs, which fluctuate with production volume, including materials and labor. Variable costs often exhibit diminishing marginal returns, meaning the marginal cost of producing additional units may increase after a certain point. This type of cost management insight is critical for businesses, especially in industries where the proportion of fixed to variable costs can greatly influence pricing strategies and profit margins.