Final answer:
A business fails when it closes due to financial losses, which can be caused by management issues, competition, or market changes. Despite the hardships these failures cause, they are an integral part of a flexible and innovative market system.
Step-by-step explanation:
A business failure occurs when a business closes with financial losses to creditors. This can happen for various reasons, such as poor management, unproductive workers, tough competition, or shifts in market demand and supply that affect the prices of outputs and inputs. The U.S. Small Business Administration reported that in 2011, while 534,907 new firms entered the market, 575,691 firms failed. Business failures can be extremely difficult for the workers and managers involved, but from an economic perspective, they are part of a market system that needs to remain flexible in order to satisfy customers' needs, keep costs low, and continue to innovate with new products.