Explain the concept of 'machine epsilon' and its significance in understanding rounding errors.

Machine epsilon (ε) is the smallest positive floating-point number such that 1 + ε ≠ 1. It represents the limit of precision of the floating-point representation. It signifies the smallest difference between 1 and the next largest representable number. Machine epsilon indicates the maximum possible relative error that can be represented by a floating-point number. A smaller machine epsilon implies higher precision and less susceptibility to rounding errors.