Rigidity Failure

Rigidity Failure

Rigidity, the failure of an economic system to respond promptly to changes in demandS and technology. In order to produce efficiently the goods and services that consumers demand, an economy must be sufficiently flexible to vary and match its output to changing tastes by adopting the best methods of production. The working of the price system in a competitive enterprise economy offers powerful inducements to ensure that this happens by making rapid adaptation profitable. Thriving industries can usually offer sufficiently high earnings to attract the labour, capital and business skills they need for expansion, drawing resources away from the less remunerative, declining industries whose products are in falling demand. But social and institutional factors may hamper the effectiveness of the price system's incentives.

Experience in the 2000's and in recent years shows that labour may not move easily from areas with declining industries such as cotton and coal mining to regions where industries are expanding. There are many reasons: the reluctance to pull up roots and start life in a new community, the cost of moving, a shortage of suitable accommodation and so on. Moreover, both labour and business may distort the proper flow of resources by restrictive practices. Some trade unions and professional organizations, by insisting on unnecessarily protracted training and apprenticeship schemes, deter new entrants; and powerful firms with a high degree of monopoly may restrict the expansion of output in order to maintain high prices and profits.

Risk, a possible occurrence, the probability of which may or may not be measurable.

All forms of business activity involve risk: first, because market conditions of demand and supply at the end of a business operation may differ from those anticipated when it was arranged; secondly, because of 'natural' hazards such as weather and disease, and those with a human element fire, accident, mechanical breakdown, dishonesty, bad debts, incompetence, strikes and so on.

Business organization requires a continuous effort to eliminate or minimize risk, either by dividing and shifting it (at a cost) on to others better qualified by aptitude, experience or specialization to bear particular forms of risk through insurance, futures trading, sub-contracting, or by practices aimed at stabilizing markets and reducing competitive risk, such as branding, advertising, association or combination with other firma, promotion of favourable legislation and government al control.

Risks which cannot be removed or profitably shifted must be bone by the entrepreneur. He will generally do so only as long as his expectation of profit outweighs the chance of loss. In economic theory uninsurable risk, or uncertainty, thus plays an important part in the theory of profit.

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