Class 11 Business Studies Chapter 1 Nature and Purpose of Business

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Class 11 Business Studies Chapter 1 Nature and Purpose of Business

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Nature and Purpose of Business

Chapter: 1


1. Which of the following does not characterize business activity?

(a) Production of goods and services. 

(b) Presence of risk.

(c) Sale or exchange of goods and services.

(d) Salary or wages. 

Ans : (d) Salary or wages. 

2.  Which of the broad categories of industries covers oil refinery and sugar mills?

(a) primary.

(b) Secondary.

(c) Tertiary.

(d) None of them.

Ans: (b) Secondary.

3. Which of the following cannot be classified as an auxiliary to trade?

(a) Mining.

(b) Insurance.

(c) Warehousing.

(d) Transport.

Ans: (a) Mining.

4. The occupation in which people work for others and get remunerated in return is known as

(a) Business.

(b) Employment.

(c) Profession.

(d) None of them.

Ans: (b) Employment.

5. The industries which provide support services to other industries are known as

(a) Primary industries. 

(b) Secondary industries.  

(c) Commercial industries.

(d) tertiary industries. 

Ans : (d) Tertiary industries.

6. Which of the following cannot be classified as an objective of business?

(a) Investment.

(b) Productivity. 

(c) Innovation.

(d) profit earning.

Ans: (a) Investment.

7. Business risk is not likely to arise due to

(a) Changes in government policy.

(b) Good management.

(c) Employee dishonesty. 

(d) Power failure.

Ans: (b) Good management

Short Answer Questions

1. State the different types of economic activities. 

Ans: Business activities may be divided into five categories :

(a) Activities related to production of goods. 

(b) Activities related to rendering of services.

(c) Activities related to distribution of goods.

(d) Activities rendering distribution assistance. 

(e) Activities rendering financial assistance.

Broadly, business activities may be divided into two main divisions (a) Industry and (b) Commerce.

2. Why is business considered an economic activity? 

Ans: Business includes only economic activities. All those activities relating to the production and distribution of goods and services are called economic activities. These activities are undertaken with economic motive, Business is carried on with a profit motive. Any activity undertaken with out economic considerations will not be a part of business. So, business covers only economic activities.

3. Explain the concept of business.

Ans: The business is an activity which is primarily pursued with the object of earning profits. A business activity involves production, exchange of goods or services to earn profits or to earn a livelihood.

The word ‘Business’ literally means ‘a state of being busy. Every person is engaged in some kind of occupation, a farmer works in the field, a worker works in the factory, a clerk does his office work in the office, a teacher in the class, a sales man is busy in selling the goods and entrepreneur is busy in running his factory. The primary aim of all these persons is to earn their livelihood while doing some work.

4. How would you classify business activities. 

Ans:  Business activities can be classified as below:

5. What are the various types of Industries.

Ans:  (1) Primary and Genetic Industry. 

(ii) Construction Industry. 

(iii) Manufacturing Industry. 

(iv) Synthetic Industry.

6. Explain any two business activities which are auxiliaries to trade. 

 Ans: Two business activities which are auxiliaries to trade are:

(i) Transport: Goods may be produced at places where they are in less demand. These goods are to be taken to the place of consumption. With the help of transport facilities we can create ‘place utility’ in goods. The goods are taken from a place where there is less demand to the places where they are in more demand. The place utility helps the producer to increase the production and earn a remunerative price.

(ii) Distribution: The producer of goods may not be able to come into direct contact with the consumers. In the present day world, the consumers are in millions to know the consumers. A chain of middlemen. The middlemen purchase goods from the producers and take them to the consumers. Both sides are relieved of their worries. The chain of wholesalers, retailers, brokers, agents, etc. operates between the producer and the consumers and removes the hindrance of persons.

7. What are the role of profit in business. 

Ans:  (1) Main Aim. A business is established to eam profits. 

(ii) Business Expansion and Growth. 

(iii) For Facing Adverse situations. 

(iv) Measures of prosperity. Profitability is a barometer for measuring economic prosperity of a country. 

(v) Social welfare profitability is essential for fulfilling social goals also.

8. What is business risk? What is its nature?

Ans: The business involves larger element of risk and uncertainty. In fact a businessman tries to foresee any futures’ uncertainties and plan his business activities accordingly. The factors on which business depends are never certain, so the business opportunities will also be uncertain, there may be a shift in demand, strike by employees, floods, war fall in prices, fluctuations in money market, etc. If a businessman is able to foresee future uncertainties and is able to bear them then he will be successful, otherwise he may be forced out of business. The risk element in business keeps a person vigilant and he tries to ward off his risk by executing his polices properly.

Long Answer Questions

1. Explain in brief the nature of business. 

Ans: The nature of business enterprises irrespective of its size or type of Work are discussed in brief below:

(i) Creation of Utilities: A business creates utility in goods and services and delivers them to those who need them are willing to pay price. It buys raw materials, converts them into goods with the help of processes and delivers them to the users. Thus business earns profit out of this transfer.

(ii) Dealing in goods and services: A business deals with goods and/or Services. Goods may be either consumers goods or producers goods. Consumers goods are in the form in which they use them. Consumers goods may be for consumption as for future use. Producers goods are used for further production of goods. The goods may be produced or manufactured by the business or procured from other for further sale.

There are a number of difficulties for sending goods from producers to users. These difficulties are overcome with the help of Services. The services may be in the form of banking, insurance, transport, warehousing, etc.

(iii) Continuity in dealings: Dealing in goods and Services become business only if it is undertaken on regular basis. An isolated transaction does not become a business

(iv) Sale, Transfer or Exchange: The sale, transfer or exchange of goods and/or services for as price is the basic feature of business Purchase of goods and services for personal use is not a business activity. The purchase of goods by a retailer is business because it is for resale on profit while a purchase by a consumer is not business because it is for consumption.

(v) Profit Motive: The objective of a business activity is to earn profits. The hope of earning money and acquiring wealth brings people into business. A business cannot Survive for long in the absence of profits. Profits are required not only for Survival but also for expansion and development.

(vi) Element Risk: The element of risk and uncertainty is prevent in business. Risk implies the uncertainty of removed or the possibilities of loss. Uncertainty and risk are present in all economic activities but it is more prevalent in business. 

2.  Compare business with profession and employment. 

Ans: A business is different from profession and employment in the following ways.

(i) Formation: An entrepreneur establishes a business unit and starts production of goods and services for satisfying human wants. He undertakes this activity to earn profits. He has to complete formalities like registration, Commencement of business, etc. to bring the unit into existence. A professional firm on the other hand comes into existence when a professional who holds the qualification to undertake that work. An employment is a contract to take up a job for somebody else. The agreement of employment may be oral or written. While business and profession are self-employment and service involves employment under somebody else.

(ii) Type of work: A business deals in production and exchange of goods and services for the benefit of the community. A professional provides a specialised service to the clients. An employee on the other hand, undertakes the work assigned to him by his employer. 

(iii) Qualifications: No educational or technical qualifications are prescribed for setting up a business unit. A professional is required to acquire a particular degree or qualification prescribed by the professional body in order to undertake that work. It is the expert knowledge which a professional is expected to exercise. There is no qualification binding for taking up a service, however, a well qualified person can get a better job.

(iv) Motive: The primary aim of a business is to earn profits by providing goods and services to the society. A professional has a service motto besides earning his fees. A dedicated service to the society is emphasised by code of ethics of the professional bodies. An employer has to take up the work as per the terms and conditions of his employment or contract of service.

(v) Investment: A business requires an investment as per the nature and scale of operations. A professional has to spend money on setting up his office or place of work for providing service to the elements. An employment does not require any investment at all. It is employer who is required to invest and not the employee. Investment in a profession is less as compared to that of business.

(vi) Membership: A professional has to be a member of a body. A lawyer has to take permission from Bar council of India to start legal profession. Similarly, other professional bodies too give permission to members for entering their area. Though there are many bodies for the businessman but their membership is not compulsory similarly no membership of a body is required to take up a job.

(vii) Risk: There is a greater element of risk in business as compared to service and profession. The motive of setting up a business is to earn profit but there can be loss too. A professional earns fees for his service there cannot be a negative fees. An employee earn wages or salary regularly. So for as he is in service, he has no risk at all.

(viii) Transfer of Interest: A profession and employment cannot be transferred to anybody else since these are based on professional skill of the concerned person. An interest in business can be transferred to any body else by completing formalities required under concerned laws.

3. Explain with examples the various type of Industries. 

Ans: The industries are mainly divided into three Categories which are as follows:

(i) Primary Industries: Primary industries includes all those industries which are connected with extraction and production of natural resources and production and development of living organisms, plant etc. Primary industries may extractive industries which are involved extraction of natural resources such as, farming, Fishing, lumbering, mining etc. and genetic industries such as animal husbandry, diary farming, poultry farming, agriculture etc.

(ii) Secondary Industries: Secondary industries include such industries which process the materials to produce goods for final consumption or for further processing by other industrial units. For example, cotton or jute into textile, timber into furniture, iron ore into steel, bamboos into pulp and so on. Secondary industries may include the manufacturing industries such as spinning, wearing, iron melting, soap making etc, and construction industries which uses the finished products of other industries for construction of movable or immovable property such as bridges, railways dams, buildings etc. The construction industries uses the products of other industries such as bricks, cement, boulders, stones chirps, mood, bamboos etc. For major construction like dams, bridges etc. bulldozers, earth removers, cranes etc. used.

(iii) Tertiary Industries: These industries are also known as service industries, because they provide service facilities. These industries provide support services to primary and secondary industries as well as trading activities. Transport, communication, banking, insurance and professional services of chartered accountant, cost accountants, lawyers, doctors, resource persons etc. are also part of service industry.

Some of the illustration of tertiary industries are mentioned below:

(a) Hotels provide accommodation to various classes of people.

(b) Railways facilitate for tourist carrying man and materials from one place to another place.

(c) Nursing times provide health care and treatment facilities.

(d) Lawyers and advocates help the clients in legal matters etc.

4. Describe the activity relating to commerce. 

Ans: “Commerce embraces all those processes, which help to break the barriers between producers and consumers. It is the sum total of those processes, which are engaged in the removal of hindrance of persons (trade) place (transport and insurance) and time (warehousing) in the exchange (banking) of commodities.

So, it can be said that the activities which establish the relationship between producers and consumers are known as commerce.

Components of Commerce: Commerce can be classified into two categories. 

(A) Trade and 

(B) Aids to Trade.

(A) Trade: Trade is the process of taking goods from the source of production or place of procurement to the consumers. The producers cannot come into direct contact with consumers, so there should be some channel which will facilitate the transmission of goods from the producers to the consumers. The channel which helps the exchange of goods is called trade.

Classification of trade: 

Trade may be classified as follows: 

(a) Internal trade. 

(b) External trade. 

(c) Wholesale and Retail trade.

(a) Internal trade or home trade: The purchase and sale of goods insides the country is called internal trade. Goods can be taken to any place but within the boundaries of the country. Internal trade may be divided as such.

(i)  Local Trade: When the demand for products is limited only to a particular place, it is called local trade. Goods, are produced according to the local needs of the consumers. The producers and the consumers belong to the same place. The goods traded in local markets are generally goods of daily use and perishable goods. These goods are vegetables, milk, bread, etc.

(ii) Provincial or State Trade: These goods are of a durable nature and are sent throughout the state or province. The trade is limited to the boundaries of the state. Sometimes government puts some restrictions on the sale of goods outside the state. Sometimes goods are produced according to the needs, requirements of customers of a particular region of state, then these goods are not required outside the boundaries of the states.

(iii) Inter state Trade: The trade conducted throughout the country but within the national boundaries is called inter state trade. The goods traded are of durable nature and can be stocked for a longer period. The production of these goods is on a large scale basis and they are sent to other parts of the country. Various kinds of textiles, kerosene, petrol, iron, steel, etc. are traded on the inter state basis.

(b) External Trade or Foreign Trade: When trade takes place between two countries, it is called foreign trade. Two countries are involved in foreign trade. The hindrances of place, time, risk, exchange are overcome with the help of various agencies. External trade generally requires permission from the respective countries. External trade may be import trade or export trade. When goods are purchased from outside countries, it is called import trade. On the other hand, when goods are sold and sent out to other countries, it is called export trade.

(c) Wholesale and Retail Trade: In wholesale trade goods are purchased in large quantities and are sold to retailers. A wholesaler is a link between the producer and the retailer. This helps the producers in making bulk production and selling in large quantities to traders. A wholesaler does not come into direct contact with the consumer.

Retail trade involves selling goods to the final consumer. Goods are sold in small quantities to the consumers. A retailer purchases goods from a wholesaler and sells them to the consumer. He provides a link between the wholesaler and the consumer.

(B) Hindrances and Aids to Trade: In the course of exchange of goods, various problems are encountered. These problem me e regarding transport of goods from the producers to the consumers financing the trade transactions, facing exchange problems, providing a cover for the loss of goods in transit and arranging the storing of goods. All the difficulties are overcome with the help of various agencies known as “Aids to Trade’. The hindrances in the way of smooth trade may be of place, persons, finance, time, knowledge and risk.

(a) Hindrance of place (Transport): Goods may be produced at places where they are in less demand. These goods are to be take to the place of consumption. With the help of transport facilities we can create ‘place utility’ in goods. The goods are taken from a place where there is less demand, to the places where they are in more demand. The place utility helps the producer to increase the production and earn a remunerative price. The consumer is also helped by supplying him with the goods which otherwise might not have reached him. The various modes of transport, i.e. road, rail, sea, air have helped the growth of commerce and industries. The producer can produce goods on any scale, the demand will be there, provided the goods suit the consumers.

(b) Hindrance of Persons (Distribution): The producer of goods may not be able to come into direct contact with the consumers, In the present day world, the consumers are in millions and it is not possible for the producers to know the consumers. A chain of middlemen acts between the producers and consumers. The middlemen purchase goods from the producers and take them to the consumers. Both sides are relieved of their worries. The chain of wholesalers, retailers, brokers, agents etc. operates between the producer and the consumer and removes the hindrance of persons.

(c) Hindrance of Finance (Banking): There is always a time lag between the production and sale of goods. The traders purchase goods from the producers and then sell to the customers. It takes time to collect money after sale. There is a need to finance trade activities. The commercial banks help trade in the shape of overdraft, loans, or cash credit. The banks play an important role in international trade where trading parties are not known to each other. The documents are sent through banks. Who release the documents after collecting the dues. So banks help in overcoming financial problems. 

(d) Hindrance of Time (warehousing): Goods are produced in anticipation of demand. These may also be produced at a time when they are not needed. So there is need to store goods upto a time, these are not required for consumption. The hindrance of time is overcome with the help of warehouse. The foreign trade needs the help of warehouse even more because there is more time gap between production and consumption. Agricultural products are produced seasonally, but they are required throughout the year. So, there is need to store them, so that they may be supplied according to demand.

(e) Hindrance of knowledge (Advertisement and salesmanship): The consumers may not be aware of the availability of various goods in the market. The absence of information about goods is a great hindrance in the way of consumers buying them. The producer will also like to increase his customers. The advertisement and salesmanship helps in informing the consumer about the availability and usefulness of various products in the market.

(f) Hindrance of Risk (Insurance): There is a risk involved in transporting goods from one place to another. There can be a risk due to fire or theft. The fear of loss of goods due to any cause acts as an obstacle in the development of trade. The insurance companies provide a coverage for all types of losses of goods. The insurance coverage has given a fillip not only to the national trade but also to the international trade.

(g) Hindrance of Information (Communication): The buyers and sellers at wholesale level and retail level need the services of various agencies which communicate their messages among themselves. The producers intimate to their customers about the production of goods. The intending buyers send orders to the producers for supply of goods. The services of post offices, telephones, telegraph office, telex, etc. are utilised for communicating purpose.

5. Why does business needs multiple objectives? Explain any five such objectives.

Ans: Business is an economic institution operating in a socio-economic and political environment. Therefore, its objectives should be defines keeping in view its prevailing environment and its needs for survival and its needs for survival and growth. Like any other institution, business has several rather than a single objective. The objectives of business are multi dimensional in nature. Generally profit motive is considered to be the primary objective of business, but profit making is not the sole or only objective of a business. Every business enterprise has to achieve multiple objectives to justify its existence.

The various objectives of business may broadly be classified as follows:

(i) Organic objectives. 

(ii) Economic objectives. 

(iii) Social Objectives.

(iv) Human Objectives. 

(v) National Objectives.

The realisation of organic and economic objectives helps the business directly and immediately where as the Social, human and national Objectives help the business indirectly and in the long run.

(i) Organic Objectives: The first concern of a business enterprise is to ensure its survival. When the enterprise is assured of its survival, it will aim at growth and expansion. To accomplish this objective, it will attempt to win prestige, recognition and goodwill from the society in which it operates. In order to pass through these stages in time and with strength, a business unit uses several methods, e.g. ploughing back of profits, attaining optimum size to avail of the economies of scale etc. Organic objectives are the foundation for achieving all other objectives of business.

(ii) Economic objectives: Economic objectives should aim at satisfaction of human needs for different kinds of goods and services and for the personal gain of the businessman.

Profit making: Risk is inherent in business and profit is the reward for undertaking risk. A businessman must earn profits in order to stay in business. The expectation of profit provides the basic incentive to business pursuits. But profit making is not the sole objective of business.

(iii) Social objectives: It is often found that economic objectives of business mainly centre round profit motive. But profit should be distinguished from profit earning which is bad for every business. Profit can be canned in various ways like black marketing, hoarding, adulteration etc. That will generate business into swindling. So, as a member of the society whose well being means of the businessman also, a business man should temper his profit motive by objectives of service motive and social obligations. If a business enterprise serves the various sections of society, profits will follow automatically. Profits are, in other words, the reward which business receives by serving society. There is no conflict between profit motive and service to society. It is through service that business earns profits.

(iv) Human objectives: Human objectives demand careful consideration of the interest and well being of the employees, the consumers and the community at large, These objectives form a part of the wider social objectives and need special emphasis in view of the changing set up of the society. People are the most valuable asset of business and their well being is its main concern. The success of a business is dependent on the quality of people working in it. In order to win the cooperation of employees, business must fulfil their expectations.

(v) National Objectives: National objectives differ from social objectives in the sense that social objectives are the ways of doing business, but national objectives require the businessman to take up and develop such lines of business as are needed by the nation or country for its development. Keeping in view the overall national objective of establishing a democratic secular and socialist society and fostering growth, stability and social justice. Business in India has to serve the national objectives.

6. Explain the concept of business risk and its causes.  

Ans: The element of risk and uncertainty is present in business. Though business aims at profits, losses are quite possible and common. Before an activity can be called business there must, therefore exist not only the goal of profit but the risk of loss. Risk and uncertainty arises because the future is unknown and business has practically no control over several factors affecting profits. Business is exposed to the following risks.

(a) Changes in consumers taste fashions and demand.

(b) Change in technology resulting into obsolescence of plant, machinery and techniques of production.

(c) Changes in the degree of competition in the market.

(d) Scarcity of power, fuel, raw-materials etc.

(e) Deterioration in industrial relations leading to strikes, lock outs, gheraos etc. 

(f)  Fire, theft and natural calamities which can be insured against.

(g) Faulty managerial decisions concerning the use of various resources.

7. What factors are important to be considered while starting a business. Explain. 

Ans: The various requirements for the success of a business are discussed below :

(i) Setting objectives: The setting up of business objectives is the first thing to be done by the management Because after deciding the objectives, the ways and means will be determined to achieve

the objectives. Management as well as every person concerned with the business should know the aim and objectives of the business.

(ii) Proper planning: After determining the objectives the work should be planned in all its perspective. Planning involves forecasting and laying down the course of action. Proper planning helps in achieving the desired objective of the business in future. Future is always uncertain and estimation of future happenings are very difficult. So, planning helps in estimation of future uncertainties and determining the possible course of action for future.

(iii) Sound organisation: Organisation is an arrangements by which tasks are assigned to the employees so that, they can work effectively to achieve the actual purpose. The duties and responsibilities of all the persons are defined and they should know what they are to do. An effective organisation system is essential for the success of a business.

(iv) Proper Financial Planning: The purpose of financial planning is to make sure that adequate funds are raised at the minimum of cost. The required capital should be made available at all times otherwise it will hamper the work. The scarcity of capital and to much of it both are bad for the business concern. A proper plan is necessary for providing funds for smooth running as well as for future development of the business.

(v) Location and Layout of Plant: Another important point to be considered by the management at the time of starting a business is regarding the location of the plant. The plant should be located at a place where all factors of production are available at lowest cost. The location of business in suitable place also helps in achieving the main objective of the business, Raw materials, Labour, power and markets for the finished products should be available near the place of location.

After deciding about the location, the layout of the plant should be done systematically. The office building and warehouse should be located near the factory, Proper layout will be enable the economical use of available space. Proper location and layout of business are necessary for the success of a business.

(vi) Marketing system: The marketing aspect of a business is more important than even production. There is no use of producing a thing if it cannot be sold. Marketing management is essential for earning profits. Hence management should decide about the channel of distribution of their product in the market.

(vii) Research: In the changing technology world, it is essential to use latest devices for production and marketing of goods. Change is the essence of business. Everyday new methods of productions are found. Consumer needs and preferences should be taken into consideration while devising the production and-marketing policies. To cope with the changing situation research and development should be given due importance for the success of a business.

(viii) Dynamic Leadership: The success of a business will depend upon the efficiency of its management. The task of management is to plan, organise, coordinate and direct the various activities for achieving business objectives. This will be possible only if the leadership is dynamic. The persons managing the concern should have foresight, initiative, courage and aptitude for a change. The leader should possess these qualities to take the concern to the road of progress.

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