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NCERT Class 11 Business Studies Chapter 1 Business Trade and Commerce
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Business Trade and Commerce
Chapter: 1
| PART – Ⅰ |
| EXERCISES |
Short Answer Questions:
1. Why is business considered as economic activity?
Ans: Business is considered to be an economic activity because it is undertaken with the objective of earning money or livelihood and not out of love, affection, sympathy or any other emotion. It may be mentioned here that this activity can be undertaken either on a small and individual level.
2. How does business contribute to the economic development of a country?
Ans: Business plays a vital role in the economic development of a country in several ways. It is interesting to note that entrepreneurship besides providing self-employment to the entrepreneur is responsible to a great extent for creation and expansion of opportunities for the other two economic activities too, that is, employment and profession. And, in the process, business entrepreneurship becomes crucial for overall economic development of a nation.
3. State the different types of economic activities.
Ans: Economic activities may be divided into three major categories viz., Business, Profession and Employment.
(i) Business: The term business is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits.
(ii) Profession: A profession is a type of job that requires advanced education or training. Profession is an economic activity that requires special knowledge and skill to be applied by individuals for earning their living.
(iii) Employment: Employment is the occupation in which people work for others and get remuneration in return. It serves as a means of distributing wealth and providing purchasing power to workers through wages.
4. State the meaning of business.
Ans: The term business is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits.
5. How would you classify business activities?
Ans: Various business activities may be classified into two broad categories —industry and commerce.
(i) Industry: Industry refers to economic activities, which are connected with conversion of resources into useful goods. Generally, the term industry is used for activities in which mechanical appliances and technical skills are involved.
(ii) Commerce: Commerce includes two types of activities, viz., (i) trade and (ii) auxiliaries to trade. Commerce, therefore, includes both, buying and selling of goods, i.e., trade, as well as auxiliaries, such as transport, banking, etc.
6. What are the various types of industries?
Ans: Industry refers to economic activities, which are connected with conversion of resources into useful goods.
(i) Primary industries: These include all those activities which are concerned with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc.
(ii) Secondary industries: These are concerned with using materials, which have already been extracted at the primary sector. These industries process such materials to produce goods for final consumption or for further processing by other industrial units.
(iii) Tertiary industries: These are concerned with providing support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities.
7. Explain any two business activities which are auxiliaries to trade.
Ans: The two business activities which are auxiliaries to trade are:
(i) Transport and Communication: Production of goods generally takes place in particular locations. For instance, tea is mainly produced in Assam; cotton in Gujarat and Maharashtra; jute in West Bengal and Odisha; sugar in U.P., Bihar and Maharashtra and so on.
(ii) Banking and Finance: Business activities cannot be undertaken unless funds are available for acquiring assets, purchasing raw materials and meeting other expenses. Necessary funds can be obtained by businessmen from a bank.
8. What is the role of profit in business?
Ans: (i) One of the objectives of business is to earn profits on the capital employed.
(ii) Profit acts as the main driving force behind starting and running a business.
(iii) Profit in business plays a major role in the growth and development of any nation.
9. What is meant by business risk?
Ans: The term ‘business risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events.
10. State the causes of risks involved in business?
Ans: Nature of business risks can be understood in terms of their peculiar characteristics:
(i) Risk is an essential part of every business: Every business has some risk. No business can avoid risk, although the amount of risk may vary from business to business.
(ii) Business risks arise due to uncertainties: Uncertainty refers to the lack of knowledge about what is going to happen in future.
(iii) Degree of risk depends mainly upon the nature and size of business: Nature of business and size of business are the main factors which determine the amount of risk in a business.
(iv) Profit is the reward for risk taking: ‘No risk, no gain’ is an age-old principle which applies to all types of business. Greater the risk involved in a business, higher is the chance of profit.
Long Answer Questions
1. Discuss the development of indigenous banking system in the Indian subcontinent.
Ans: Indian subcontinent enjoyed the fruits of favourable balance of trade, where exports exceed imports with large margins and the indigenous banking system benefitted the manufacturers, traders and merchants with additional capital funds for expansion and development. Commercial and Industrial banks later evolved to finance trade and commerce and agricultural banks to provide both short and long-term loans to finance agriculturists.
Many leading trade centres were developed in ancient times for the import and export of goods, some of them being Patliputra, Peshawar, Taxila, Indraprastha, Mithila, Maduram, Surat, Ujjain, Kanchi, Mithila. Major export items were Spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products, etc. Major imports were Horses, animal products, Chinese silks, linen, wine, gold, silver, copper, etc. There were all kinds of towns— port towns, manufacturing towns, mercantile towns, the sacred centres, and pilgrimage towns. Their existence is an index of prosperity of merchant communities and professional classes.
2. Define business. Describe its important characteristics.
Ans: Business means being busy. However, in a specific sense, business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits. Business starts with production and ends with consumption. Making the finished products reach the consumer involves a series of steps. The work of production of goods is covered under Industry and the remaining activities belong to commerce.
The nature of business or its fundamental character must be explained in terms of its distinguishing characteristics, which are as follows:
(i) An economic activity: Business is considered to be an economic activity because it is undertaken with the objective of earning money or livelihood and not out of love, affection, sympathy or any other emotion.
(ii) Production or procurement of goods and services: Before goods are offered to people for consumption, these must be either produced or procured by business enterprises. Thus, every business enterprise either manufactures the goods it deals in or acquires them from producers, to be further sold to consumers or users. Goods may consist of consumable items of daily use, such as sugar, ghee, pen, notebook, etc., or capital goods, like machinery, furniture, etc.
(iii) Sale or exchange of goods and services: Directly or indirectly, business involves transfer or exchange of goods and services for value. If goods are produced not for the purpose of sale but for personal consumption, it cannot be called a business activity. Cooking food at home for the family is not business, but cooking food and selling it to others in a restaurant is business.
(iv) Dealings in goods and services on a regular basis: Business involves dealings in goods or services on a regular basis. One single transaction of sale or purchase, therefore, does not constitute business. Thus, for example, if a person sells his/ her domestic radio set even at a profit, it will not be considered a business activity.
(v) Profit earning: One of the main purposes of business is to earn income by way of profit. No business can survive for long without profit. That is why businessmen make all possible efforts to maximise profits, by increasing the volume of sales or reducing costs.
(vi) Uncertainty of return: Uncertainty of return refers to the lack of knowledge relating to the amount of money that the business is going to earn in a given period. Every business invests money (capital) to run its activities with the objective of earning profit. But it is not certain as to what amount of profit will be earned.
(vii) Element of risk: Risk is the uncertainty associated with an exposure to loss. It is caused by some unfavourable or undesirable event. Risks are related with factors, like changes in consumer taste and fashion, changes in method of production, strike or lockout at workplace, increased competition in market, fire, theft, accidents, natural calamities, etc.
3. Compare business with profession and employment.
Ans: The difference/Compare between these three terms is given below:
| Basic | Business | Profession | Employment |
| Mode of establishment | Entrepreneur’s decision and other legal formalities, if necessary | Membership of a professional body and certificate of practice | Appointment letter and service agreement |
| . Nature of work | Provision of goods and services to the public | Rendering of personalised, expert services | Performing work as per service contract or rules of service |
| Qualification | No minimum qualification is necessary | Qualifications, expertise and training in specific field as prescribed by the professional body is a must | Qualification and training as prescribed by the employer |
| Reward or return | Profit earned | Professional fee | Salary or wages |
| Capital investment | Capital investment required as per size and nature of business | Limited capital needed for establishment | No capital required |
| Risk | Profits are uncertain and irregular; risk is present | Fee is generally regular and certain; some risk | Fixed and regular pay; no or little risk |
| Transfer of interest | Transfer possible with some formalities | Not possible | Not possible |
| Code of conduct | No code of conduct is prescribed | Professional code of conduct is to be followed | Norms of behaviour laid down by the employer are to be followed |
| Example | Shop, factory | Legal, medical profession, chartered accountancy | Jobs in banks, insurance companies, government departments |
4. Define Industry. Explain various types of industries giving examples.
Ans: Industry refers to economic activities, which are connected with conversion of resources into useful goods. Generally, the term industry is used for activities in which mechanical appliances and technical skills are involved. These include activities relating to producing or processing of goods, as well as, breeding and raising of animals. The term industry is also used to mean groups of firms producing similar or related goods. For example, the cotton textile industry refers to all manufacturing units producing textile goods from cotton. Similarly, the electronic industry would include all firms producing electronic goods, and so on.
The various types of industries are listed below with examples:
(i) Primary industries: These include all those activities which are concerned with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc.These are divided as follows.
(a) Extractive industries: These industries extract or draw products from natural sources. Extractive industries supply some basic raw materials that are mostly products of geographical or natural environments.
(b) Genetic industries: These industries are engaged in breeding plants and animals for their use in further reproduction. Seeds and nursery companies are typical examples of genetic industries.
Examples of Primary industries are: Agriculture, Fishing, Forestry.
(ii) Secondary industries: These are concerned with using materials, which have already been extracted at the primary sector. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry.
(a) Manufacturing industries: These industries are engaged in producing goods through processing of raw materials and, thus, creating form utilities. They bring out diverse finished products that we consume, or use through the conversion of raw materials or partly finished materials in their manufacturing operations.
(b) Construction industries: These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are an important part of the construction industries.
(iii) Tertiary industries: These are concerned with providing support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities. As business activities, these may be considered part of commerce because as auxiliaries to trade these activities assist trade. Here are some examples of tertiary industries Healthcare Services, Education, Hospitality.
5. Describe the activities relating to commerce.
Ans: Commerce includes two types of activities, viz., (i) trade and (ii) auxiliaries to trade. Buying and selling of goods is termed as trade. But there are a lot of activities that are required to facilitate the purchase and sale of goods. These are called services or auxiliaries to trade and include transport, banking, insurance, communication, advertisement, packaging and warehousing. Commerce, therefore, includes both, buying and selling of goods, i.e., trade, as well as auxiliaries, such as transport, banking, etc.
Commerce provides the necessary link between producers and consumers. It embraces all those activities, which are necessary for maintaining a free flow of goods and services. Thus, all activities involving the removal of hindrances in the process of exchange are included in commerce. The hindrances may be in respect of persons, place, time, risk, finance, etc. The hindrance of persons is removed by trade, thereby, making goods available to consumers from the possession or ownership producers. Transport removes the hindrances of place by moving goods from the place of production to the markets for sale. Storage and warehousing activities remove the hindrance of time by facilitating holding of stocks of goods to be sold as and when required.
Advertising makes it possible for producers and traders to inform consumers about the goods and services available in the market. Hence, commerce is said to consist of activities of removing the hindrances of persons, place, time, risk, finance and information in the process of exchange of goods and services.
6. Explain any five objectives of business.
Ans: Objectives are needed in every area that influences the survival and prosperity of business.
The five objectives of business are discussed below:
(i) Market standing: Marinating goodwill and reputation of one’s business is paramount to succeed and prosper. It helps in forming a distinct identity in the market and is referred to as market standing in relation to its competitors.
(ii) Innovation: Innovation is central to the growth of any business enterprise. It helps businesses to scale up and give a competitive edge to the enterprise in the market. Innovation is defined as an introduction of new ideas or methods in the way something is done or made.
(iii) Productivity: Productivity is ascertained by comparing the value of output with the value of inputs. It is used as a measure of efficiency. In order to ensure continuous survival and progress, every enterprise must aim at greater productivity through the best use of available resources.
(iv) Physical and financial resources: Any business requires physical resources, like plants, machines, offices, etc., and financial resources, i.e., funds to be able to produce and supply goods and services to its customers. The business enterprise must aim at acquiring these resources according to their requirements and use them efficiently.
(v) Earning profits: One of the objectives of business is to earn profits on the capital employed. Profitability refers to profit in relation to capital investment. Every business must earn a reasonable profit which is so important for its survival and growth.
7. Explain the concept of business risk and its causes.
Ans: The term ‘business risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Lower demand results in long sales and profits. In another situation, the shortage of raw materials in the market may shoot up its price.
Business risks arise due to a variety of causes, which are classified as follows:
(i) Natural causes: Human beings have little control over natural calamities, like flood, earthquake, lightning, heavy rains, famine, etc., property and income in business.
(ii) Human causes: Human causes include such unexpected events, like dishonesty, carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.
(iii) Economic causes: These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems, like rise in interest rate for borrowing, levy of higher taxes, etc., also come under these types of causes as they result in higher unexpected cost of operation or business.
(iv) Other causes: These are unforeseen events, like political disturbances, mechanical failures, such as the bursting of boilers, fluctuations in exchange rates, etc., which lead to the possibility of business risks.
8. What factors are to be considered while starting a business? Explain.
Ans: Starting a business enterprise is similar to any other human effort in which resources are employed to achieve certain objectives.
(i) Selection of type of business: The first thing to be decided by an entrepreneur is the nature and type of business to be undertaken. He/she will obviously like to enter that branch of industry and commerce, which has the possibility of greater profit.
(ii) Size of business: Size of the firm or scale of its operation is another important decision to be taken at the start of the business. Whether the business is for the MSME sector or a large scale enterprise. Whether it will operate for the manufacturing or tertiary sector.
(iii) Location of business enterprise: An important factor to be considered at the start of the business is the place where the enterprise will be located. Any mistake in this regard can result in high cost of production, inconvenience in getting, right kind of production inputs or serving the customers in the best possible way.
(iv) Financing the proposition: Financing is concerned with providing the necessary capital for starting, as well as, for continuing the proposed functioning of modern business.
(v) Physical facilities: Availability of physical facilities, including machines and equipment, building and supportive services is an important factor to be considered at the start of the business.
(vi) Competent and committed workforce: Every enterprise needs a competent and committed workforce to perform various activities so that physical and financial resources are converted into desired outputs. Since no individual entrepreneur can do everything himself, he/she must identify the requirement of skilled and unskilled workers and managerial staff.
(vii) Tax planning: Tax planning has become necessary these days because there are a number of tax laws in the country and they influence almost every aspect of the functioning of modern business. The entrepreneur has to consider in advance the tax liability under various tax laws and its impact on business decisions.
(viii) Launching the enterprise: After the decisions relating to the above mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise which would mean mobilising various resources, fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign.
