Need help understading $content_width feature added in functions.php

Hi so i understand that there is a theme feature (and a plugin) called content_width

So if i add This code in functions.php
if ( ! isset( $content_width ) ) {
$content_width = 200;
}

If i go to Settings –> media i can
A) set some sizes for images,
B) and then i can set a custom content width, but when i go to the media library to add images, i can only choose between Thumbnail, small, medium or full size, I can’t choose Custom size. What exactly is the role of Custom width?? Where does it apply?