CHAPTER 1

BUSINESS, TRADE & COMMERCE

Section II

HUMAN ACTIVITIES
All human beings, wherever they are, are required to perform some or the
other activity to satisfy their needs. They pursue different occupations to
earn a livelihood and to get some psychological satisfaction. Human
activities can be classified into two categories:

1. Economic activities. 2. Non-economic activities.

1 Economic Activities
Economic activities are any activities that are carried out with the goal
of earning money and livelihood.

For example, a worker working in a factory, a teacher teaching in school

etc. It is mainly of three types: Business, Profession & Employment.

2 Non-economic Activities
Activities which are performed out of love, affection, sympathy & without
the aim of earning profit are called non-economic activities.

For example -Social work, religious activities etc.

Difference between Economic and Non-Economic Activities

Point of Economic Activities Non-Economic Activities

Difference
Earning money and creation Social or psychological
Motive of wealth. motive.
Expectation Money income is expected. Money income is not
expected.
Purpose Creation of wealth. Psychological satisfaction.

Production of goods and Mental satisfaction of

Outcome services. persons who undertake them.
Examples Business, Profession, Family-oriented activities,
Employment. religious, social service
and patriotic activities.

Types of Economic Activities

Economic activities can be divided into three categories:

1. Business 2. Profession 3. Employment.

 1. Business: Business refers to those economic activities which are
connected with the regular production, purchase, sale or distribution of
goods or services with the main objectives of earning profit.

Examples: Fishing, mining, farming, manufacturing, wholesales etc.

Characteristics of Business

E Economic Activity

P Production & Procurement of Goods & Services

S Sale or Exchange of Goods and Services

P Profit Earning

U Uncertainty of Return

R Regular Dealings in Goods & Services

E Element of Risk

1. Economic Activity
Business is considered to be an economic activity because it is undertaken with
the objective of earning money or livelihood.

2. Production & Procurement of Goods & Services

A business either manufactures the goods on its own or purchases them from
producers, and then sells them to end customers.

3. Sale or exchange of goods and services

There should be sale or exchange of goods and service between the seller & the
buyer.

4. Profit Earning
The primary objective of every business is to earn profit. No business can
survive without earning profit.

5. Uncertainty of return
It’s not certain how much profit a business is going to earn, as there is a
possibility of losses as well because of the changing environment.

6. Regular Dealings in Goods and Services

Business involves dealings in goods or services on a regular basis. One single
transaction of sale or purchase, does not constitute business.

7. Element of risk
Risk is the uncertainty associated with an exposure to loss. It is caused by
some unfavourable or undesirable events.
 2. Profession
Profession refers to the activities which require special knowledge and skill
to be applied by an individual in his work to earn a living.

❖ Example: lawyers are professionals engaged in the legal profession governed

by the Bar Council of India, doctors are professionals who are in the medical
profession and are governed by the Medical Council of India.

Characteristics of Profession

K Body of Knowledge

F Formal Education & Training

C Code of Conduct

R Restricted Entry

P Professional Association

S Service Motive

a) Body of Knowledge
A profession is an organized body of specialized knowledge related to a
particular field.

b) Formal Education and Training

Formal education and training is needed to become a professional.

c) Ethical Code of Conduct

Professional association frame norms, rules & regulation to provide guideline
to it’s member.

d) Restricted Entry
In order to become a member, one must pass the prescribed examination and
complete required training.

e) Professional Association
All professionals are governed by these associations. They frame code of
conduct, rules & regulation.
E.g., Medical - Medical Council of India, Legal - Bar Council of India,
Accountancy - Institute of Charted Accountants of India.

f) Service Motive
Providing services to the clients in order to maintain the high status of the
profession.
3. Employment
Employment refers to an activity in which an individual works regularly for
another person and gets salary/wages in return.

❖ Examples: Working in offices, banks, insurance companies, shops, as a

manager, clerk, peon, salesman etc.

Characteristics of Employment
i. Employees & Employer relationship.
ii. No need of capital.
iii. Qualification depends upon nature of job.
iv. Getting salary & wages.

Difference between Business, Profession and Employment

Basis of
Difference Business Profession Employment
May commence with May commence on Commences on
the decision of completion of a joining duty by
Commencement entrepreneur. degree course and entering into a
by getting a service
certificate of agreement.
practice.
No minimum Prescribed and Qualification
qualification professional depends on the
Qualification required. qualification and nature of job.
training
required.
Depends on the Limited No investment is
scale of investment is required.
Investment business. required.
Always risk and Little risk No risk involved.
Risk uncertainty. present.

Transfer of Possible with Not possible. Not possible.

Interest some formalities.
Earn income in
the form of
Main Objective Earn profit. Provide service. salary by
satisfying the
employer.
No prescribed Prescribed by the The terms and
Code of Conduct code of conduct. professional conditions of
associations. service contract
are applicable on
employee.
Production, Rendering of
purchase and sale personalised Performing the
Nature of Work or exchange of services of work as assigned
goods and specialised by the employer.
services. nature.
 Reward for Reward for Reward for
Reward business is profession is employment is
called profit. called fees. called salary or
wage.

Objectives of Business
Earning profit is very important and the prime objective of every business but it
cannot be the sole or only objective of business.

i. Market Standing/Goodwill
It refers to the position of an enterprise in relation to its competitors. A
business enterprise must aim at standing on stronger footing in terms of
offering competitive products at reasonable prices to its customers and serving
them to their satisfaction.

ii. Innovation
Innovation is the soul of business in modern times. 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. Greater productivity ensures
continuous growth through best utilization of 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. Every business is expected to make the best use of
these resources.

v. Earning Profit
The most important objective of every organization is earning adequate amount
of profit. Profit is essential for survival, growth and expansion of business.

vi. vi) Social Responsibility

Social responsibility refers to the obligation of business firms to contribute
resources for solving social problems and work in a socially desirable manner.

Role of Profit in Business

i. Survival
Profit is a source of income for a businessman which becomes his means of
livelihood.

ii. Expansion and Growth

When profit is large, a part of profit can always be reinvested for expansion
or diversification of business.

iii. Symbol of Efficiency

Profits indicate whether a business is being managed efficiently or not. Higher
profits indicate the efficiency of management and lowest profit indicate
inefficiency of management.
iv. Reward for Bearing the Risk
Profit is considered as a price or reward paid to a businessman for bearing the
risk.

v. Helps to Gain Reputation or Goodwill

A profit earning company always has a better reputation in the market as
compared to companies which are running in loss.

Classification of Business Activities

Industry
❖ Industry refers to an activity which converts raw material into useful products.

❖ Industry includes activities related to production and processing as well as

activities related to rearing and breeding of animals or other living species.
Types of Goods Manufactured in Industry

a) Producer's or Capital Goods

Those things which are used in production by other industries are called
capital goods such as, machinery, plant, equipment, etc.

b) Consumer Goods
Those things which are directly put to use are called consumer's goods like
bread, cloth, medicines, etc.

c) Intermediate Goods
Some industries manufacture such goods as are processed in some other industry
to produce some need-based goods. Such goods are called intermediate goods. For
example, they include plastic, rubber, aluminium, etc.

A. Primary Industry
The primary industry includes those activities through which the natural
resources are used to provide raw material to other industries. The primary
industries are of two types:

a) Genetic Industry
The genetic industry refers to that industry under which the breed of animals,
plants and vegetables are improved and made more useful. It includes animal
husbandry, poultry, tree planting, etc.

b) Extractive Industry
Extractive industry refers to that industry under which something is extracted
out of the earth, water or air.
For example, coal, iron, gas, etc., are extracted from the earth; stone is
taken out of the quarries, food grains and other products are obtained from
agriculture.

B. Secondary Industry
The Secondary Industry makes use of products which are extracted and produced
by Primary Industry as their raw materials, and produce finished products.

For example, mining iron ore is done in Primary Industry but steel
manufacturing is done in Secondary Industry.

a) Manufacturing Industry
These industries are engaged in the process of conversion of raw materials or
semi-finished goods into finished goods. These industries create form utility
by changing the form of raw materials into finished products.

For example, timber is converted into furniture, sugarcane into sugar, cotton
into cloth etc.

The manufacturing Industry can further be divided into four parts

i) Analytical
ii) Synthetic
iii) Processing
iv) Assembling
i) Analytical Industry
These industries separate different elements from the basic material, so as
to produce various by-products from the same element.

For example, petrol, diesel, kerosene oil etc. all are made from one basic
material that is crude oil.

ii) Synthetic Industry

In Synthetic Industry, two or more materials are mixed to manufacture some
new product.

For example, cement is manufactured by mixing limestone, gypsum and coal,

various chemicals are mixed to produce soap, paints, cosmetics etc.

iii) Processing Industry

In Processing Industry, the raw material is processed through various stages
of production and then finished goods are manufactured.

For example, Textile Industry, Iron and Steel Industry, Sugar Industry etc.

iv) Assembling Industry

In this category that industry is included wherein the parts manufactured by
different industries are assembled to produce new and useful product.

For example, manufacturing of computers, television, watches, automobiles,

cars etc.

b) Construction Industry
These industries are concerned with the construction of buildings, dams,
tunnels, roads etc. These industries use the products of manufacturing
industries. Products of this industry cannot be transferred or shifted to the
market. They are constructed and remain at a fixed site only.

C. Tertiary/Service Industry
These industries provide support services to primary and secondary industries
so that they can perform their work without any hindrances.

For Example, Banking industry, Transportation industry, Communication industry,

etc.

The various types of services provide by tertiary industry are:

i) Transport
ii) Banking
iii) Insurance
iv) Warehousing
v) Advertisement

i) Transport:
It facilitates movement of goods from one place to another.

ii) Banking:
Provides credit facility to industries and trading firms.
 iii) Insurance:
Provides coverage from various types of risks.

iv) Warehousing:
Provides storage place for goods produced by primary and secondary industry.

v) Advertising:
Provides information to consumer.

Commerce
Commerce refers to all those activities which help directly or indirectly in the
distribution of goods to the ultimate consumer. It also involves all the activities
that assists in removal of hindrances of people, place, time, finance, risk,
information faced during the exchange of goods and services.

Trade
The buying and selling of goods and services with an aim to earn profit is termed as
trade. The people who are involved in trade are referred to as traders.

Trade can be bifurcated as:

(a) Internal Trade
(b) External Trade

a) Internal Trade
Internal Trade refers to buying and selling of goods and services within
geographical boundaries of a country and in-home currency only. It is also
known as Home Trade.

The internal trade can be of two types

i) Wholesale Trade
ii) Retail Trade
 i) Wholesale Trade
It refers to buying and selling of goods and services in large quantity. The
wholesalers buy goods directly from the manufacturer and sell these goods to
retailers.

ii) Retail Trade

It refers to buying and selling of goods and services in small quantities,
retailer buys goods from the wholesaler and sells these goods to the
ultimate consumer.

b) External Trade
It refers to buying and selling of goods or services beyond the geographical
limits of the country. The external trade involves completion of various rules
and regulations such licensing, custom clearance etc.

External trade is of the following types:

i) Export
ii) Import
iii) Entrepot

i) Export Trade
It refers to sale of goods to a foreign country. The developing countries
like Ind encourage export as it results in increasing foreign reserves.

ii) Import Trade

It refers to buying of goods from a foreign country. Import of technology
capital goods is encouraged as compared to import of consumer goods.

iii) Entrepot Trade

It refers to import of goods for the purpose of export. In Entrepot, the
goods are purchased from a foreign country but not for consumption in home
country, but for selling these goods to some other foreign country.

Auxiliaries/Aids to Trade
The activities which help in smooth flow of trade are known as Aids to Trade. The
activities make buying and selling of goods more easy. These help in removing various
hindrances of trade which arise in production and distribution of goods.
 a) Transport and Communication
Transportation helps in the movement of raw material and finished products from
the place of production to the place of consumption.
E.g., Railways, roadways, waterways

Communication enables easy interaction by one party with another, who is far
away from each other.

b) Warehousing
It helps business firms to overcome the problem of storage and facilitates the
availability of goods. It assists in curbing hindrances of time.
c) Insurance
It provides protection to businesses from various types of risks such as risk
due to fire, theft etc. It assists in curbing hindrances of risk.

d) Banking and Finance

Finance is the backbone of business. Banks and financial institutions provide
credit facility, loan etc. to provide finance for smooth flow of business
activities.

e) Advertising and Public Relations

It helps them to increase the sales. It is a tool to influence customers. It
assists in curbing hindrances caused due to information.

f) Middlemen
Middleman establish contacts between producer and consumer. These people act as
mediators between the producer and consumers. These include wholesalers,
retailers etc.

Business Risk
Business Risk refers to the probability of losses or inadequate profits due to
uncertainties or unexpected events, which are beyond control.

For e.g.- change in fashion or taste and preferences of customers the demand for a
particular product may decrease which result in reduction in sales as well as
profits.

Types of Business Risk

a) Speculative Risks
It involves both the possibility of gain as well as possibility of loss. In
case of favorable market conditions there would be gain but in case of
unfavourable conditions there are possibilities of losses. It is the risk which
arise due to changes in condition.
E.g. Changes in fashion, technology, price, etc.

b) Pure Risks
It involves only the possibility of loss
arises due to fire, theft or strike. The
non-occurrence result in absence of loss
E.g. The chance of fire, theft or strike
or no loss, It is the risk which
occurrence may result in loss whereas
instead of gain.
etc.
 Nature of Business Risk

a) Risk is an essential part of every business

No business can avoid risk, although the amount of risk may vary from business
to business. Risk can be minimized, but cannot be eliminated.

b) Business risks arise due to uncertainties

Uncertainty refers to the lack of knowledge about what is going to happen in
future. Common examples of uncertainties are: change in demand, government
policy, technology etc. Business risk is due to these uncertainties.

c) Degree of risk depends mainly upon the nature and size of business
Nature of business (i.e., type of goods and services produced and sold) and
size of business (i.e., volume of production and sale) are the main factors
which determine the amount of risk in a business. A large-scale business
generally has a higher risk than what a small scale has.

d) Profit is the reward for risk taking

Businessmen earn profit because they are bearing risk. "No risk no gain” larger
the risk more is the profit. An entrepreneur bears risk with the expectation of
earning profit.

Cause of Business Risks

i. Natural Causes
The natural causes are such type of uncertain factors that human beings cannot
make any preparation against. Natural calamities like earthquake, flood,
drought, famine etc. affect a business a lot and can result in heavy losses.

ii. Human causes

Human causes are related to a chance of loss due to human being or employees of
the organization.
E.g. dishonesty, carelessness or negligence of employees, stoppage of work due
to power failure, strikes, riots, management inefficiency, etc.

iii. Economic causes

Economic causes are related to chance of loss due to change in market
conditions.
E.g. uncertainties relating to demand for goods, competition, price, collection
of dues from customers, change of technology or method of production, rise in
interest & tax etc.

iv. Other causes

These are unforeseen events, like political disturbances, mechanical failures,
such as the bursting of boiler, fluctuations in exchange rates, etc., which
lead to the possibility of business risks.
Starting a Business - Basic Factors
a) Selection of type of Business
The first thing to be decided by an entrepreneur is the nature and type of business
to be undertaken. The decision will be influenced by the customer requirements in
the market and also the kind of technical knowledge and interest the entrepreneur
has for producing a particular product.
E.g. Fashionable goods, grocery shop

b) 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. If market conditions have uncertainties and
risks are high, small scale business would be a better choice and conditions are
certain and there is moderate risk and the owner is confident then he may go for
large scale business.

c) Choice of Form of Ownership

With respect to ownership, the business organization may take the form of a sole
proprietorship, partnership or joint stock company. The choice will depend on such
factors as the line of business, capital requirements, legal formalities and so on.

d) 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. Availability of raw materials and labour,
power supply and services like banking, transportation, communication, warehousing
etc. are important factors while making a choice of location.

e) Financing the Proposition

Financing is concerned with providing the necessary capital for starting, as well
as, for continuing the proposed business. Capital is required for investment in
fixed assets, like land, building, machinery and equipment and in current assets,
like raw materials, books, debts, stock of finished goods, etc.

f) 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.

g) Competent and Committed Work Force

Since no individual entrepreneur can do everything himself, he/she must identify
the requirement of skilled and unskilled workers and managerial staff.

h) Tax Planning
Tax planning become necessary because of the multiple taxes in the country and they
influence almost every aspect of the functioning of business. Therefore, the
founder of the business has to consider the tax liability under various tax laws
and their impact on business.

i) Launching the Enterprise

After the above decisions related to various factors the entrepreneur can go ahead
with actual launching of the business which means making utilization of resources,
fulfilling legal formalities, starting the production and initiating the sales.