BUSINESS STUDIES

CHAPTER 1: BUSINESS, TRADE AND COMMERCE

INTRO (KEY DEFINITIONS)

 Business – Occupation in which people regularly engage in activities related to purchase,
production or sale of goods and services, with a view of earning profits.
 Economic activity – Activities by which we can earn our livelihood.
Ex- worker working in a factory, doctor operating in his clinic.
 Non economic activity – Performed out of love, sympathy, sentiment, patriotism etc.
Ex- housewife cooking food for her family, boy helping an old man cross the road.
 Industry – Economic activities connected with the conversion of resources into useful goods.
 Trade- Buying and selling of goods.

CHARACTERISTICS OF BUSINESS ACTIVITIES

 An economic activity – Undertaken with the objective of earning money, and not out of love,
sympathy or any other emotion.
Ex- purchase and sale by a shopkeeper, purchase and sale by a cooperative society.

 Production or procurement of goods and services – goods must be either procured or

produced by every business enterprise, before offering to people for consumption. Either
manufactures the goods themselves, or acquires them from producers to be further sold to
consumers.
Ex- Consumable items like ghee, sugar, notebook, or Capital goods like machinery, furniture.
Services include facilities offered to consumers or business firms, in the form of
transportation, banking etc.

 Sale or exchange of goods and services- Involves transfer or exchange of goods and services
for value, between seller and buyer. If goods are produced for personal consumption and not for
purpose of sale, it cannot be called business activity.
Ex- cooking food at home for family is not business, but selling it to others in restaurant is.

 Dealings in goods and services on regular basis – One single transaction of sale or purchase
does not constitute business.
Ex- if a person sells their radio set at a profit, it is not a business activity. If on a regular basis
through their shop or residence, it will be regarded as one.

 Profit earning – To earn income. No business survives long without profit, so businessmen
make all possible efforts to maximize profits, increasing volume of sales or reducing costs.

 Uncertainty of return – Every business invests money to run its activities with the objective of
earning profit, but it is not certain what amount will be incurred. There is also a possibility of
loss, despite best efforts put into the business.

 Element of risk- Caused by some unfavourable or undesirable event. No business can

altogether do away with risks.
Risks are related with factors like changes in consumer taste and fashion, changes in MOP, fire,
theft, accidents etc.
BASIS BUSINESS PROFESSION EMPLOYMENT
Mode of establishment Entrepreneur’s decision Membership of a Appointment letter and
and other legal formalities, professional body and service agreement.
if needed. certificate of practice.

Nature of work Provision of goods and
services to the public
Qualification No minimum qualification.
Reward or return Profit earned
Risk Profits are uncertain and
irregular, risk is present
Rendering of personalized Performing work as per
and expert services service contract/rules of
service
Qualifications, expertise Qualification and training
and training in specific as per employer.
field as per professional.
Professional fee Salary or wages
Fee is generally regular Fixed and regular pay, no
and certain, some risk. or little risk.

Code of conduct Not prescribed Professional code of Norms of behaviour laid

conduct to be followed. down by employer
Example Shop, factory Medical profession, CA Bank and insurance
company, govt. dept. jobs.

CLASSIFICATION OF BUSINESS ACTIVITIES

TYPES OF INDUSTRIES

PRIMARY INDUSTRY

 Concerned with extraction and production of natural resources, reproduction and development
of living organisms and plants etc.

 Extractive industries- Draw/extract products from natural sources. Supplies some basic raw
materials which are products of natural/geographical environment. Products of these
industries are then transformed into many useful goods by manufacturing industries.
Ex- Farming, mining, fishing etc.

 Genetic industries- Engaged in breeding plants and animals for their use in further
reproduction.
Ex- Seeds, nursery companies, cattle breeding farms, poultry farms etc.

SECONDARY INDUSTRY

 Using materials which have already been extracted at primary stage. They then process the
materials to produce goods for final consumption, or for further processing by other industrial
units.
Ex- Mining of iron ore (manufacturing of steel by further processing of raw irons).
  Manufacturing industries- Produces goods through processing of raw materials and creating
form utilities.
 Analytical industry- Analyses and separates different elements from the same materials.
Ex- Oil refinery.
 Synthetical industry- Combines various ingredients into a new product,
Ex- Cement.
 Processing industry- Successive stages for manufacturing finished products,
Ex- Sugar and paper.
 Assembling industry- Assembles different component parts to make a new product.
Ex- Television, car, computer.

 Construction industries- Involved in construction of buildings, dams, bridges, roads,

tunnels, canals. Engineering and architectural skills are required.

TERTIARY INDUSTRY

 Provides support and service facilities to primary and secondary industries. These may be
considered as auxiliaries to trade.
Ex- Transport, banking, insurance, warehousing etc.

COMMERCE
 Provides necessary link between producers and consumers.
 Embraces activities which are necessary for maintaining free flow of goods and services.
 All activities involving the removal of hindrances in process of exchange, may it be persons,
time, place, risk. They are all included in commerce.
 Hindrance of person removed by – trade. Makes goods available to consumers from
possession of producers.
 Hindrance of place removed by – transport. Moves goods from place of production, to the
markets for sale.
 Hindrance of time removed by – storage and warehousing. Facilitates holding of stocks of
goods to be sold as and when needed. Protection against any loss or damage to the goods, is
provided by insurance.
 Advertising helps producers and traders to inform consumers about the goods and services
available in the market.
 Make In India – Initiative launched by the Govt. of India on Sept 25, 2014. Encourages
national and multinational companies to manufacture their products in India.
Major objectives are- Job creation and skill enhancement in 25 sectors of the economy.

TRADE – ITS TYPES

 Internal Trade- Buying and selling of goods and services within geographical boundaries of a
country.
 Retail Trade- Goods purchased and sold in smaller quantities for final consumption.
 Foreign or External Trade- Exchange of goods and services between persons or organizations
operating in two or more countries.
 Import Trade- When goods are purchased from another country.
 Export Trade- When the goods are sold to other countries.
 Entrepot Trade- When goods are imported for export to other countries.
AUXILIARIES TO TRADE

 Auxiliaries to Trade- Activities required to facilitate the purchase and sale of goods, like
transport, insurance, banking etc.

 Transport and Communication- Production of goods takes place in particular locations, but
these goods are required for consumption in different parts of the country. This obstacle is
removed by transport through road, rail or coastal shipping.
Facilitates the movement of raw material to the place of production, and finished products from
factories to the place of consumption.
For producers, traders and consumers to exchange info with one another, communication
facilities such as postal services and telephone facilities may be very useful.

 Banking and Finance- Unless funds are available for acquiring assets, purchasing raw
materials and meeting other expenses, business activities cannot be undertaken. These funds can
be obtained by businessman from bank. In foreign trade, Commercial Banks helps exporters
collect money from importers.
Commercial banks lend money by providing overdraft and cash credit facilities, loans and
advances. Also undertakes collection of cheques, remittance of funds to different places, and
discounting of bills on behalf of traders.

 Insurance- Various risks like fire, theft are involved in business, and the materials or goods like
machinery, furniture, factory building must be protected. Material and goods that help in stock
or in transit (on the way), may be subjected to risk of loss or damage.
Employees also need to be protected against the risk of accident and occupational hazards. On
payment of a nominal premium, amount of loss or damage and compensation for injury if any,
can be recovered from insurance company.

 Warehousing- Goods are not sold or consumed immediately after production, so they are held
in stock to make them available as and when required.
Warehousing helps business firms to overcome the problem of storage, and facilitates the
availability of goods when needed.
Prices are maintained at a reasonable level through continuous supply of goods.

 Advertising- Methods of promoting sale of products like consumer goods (electronic,

automobile, soaps, detergents). They are manufactured and supplied in the market by many
firms.
Since it is impossible for producers and traders to contact each and every customer, information
about the goods and services available, their features, price etc, must reach potential buyers, for
promotion of sale.
Advertising helps in providing information about available goods and services, and inducing
customers to buy certain items.
OBJECTIVES OF BUSINESS
 Every business is an attempt to reap more than what has been invested. Profit is excess of
revenue over cost.
 Role of profit- It is a source of income for business persons, and of finance for meeting
expansion requirements of business.
 It indicates the efficient working of the business. It can be taken as the society’s approval of the
utility of business, also builds reputation of the business enterprise.
 But business managers may also neglect all other responsibilities towards customers,
employees, investors and society at large.
 May result in non-cooperation or opposition from affected people against malpractices of
business enterprises.

MULTIPLE OBJECTIVES OF BUSINESS

 Market standing- Refers to position of an enterprise in relation to its competitors. Must aim at
standing on stronger footing, in terms of offering competitive products to its customers and
serving them to their satisfaction.

 Innovation- Innovation in product or services, and innovation in various skills and activities
needed to supply these products and services. No business enterprise can flourish in a
competitive world without innovation.

 Productivity- Comparing the value of output with the value of input. Used as a measure of
efficiency. Enterprise must aim at greater productivity through the best use of available
resources, in order to ensure continuous survival and progress.

 Physical and Financial Resources- Business needs physical resources like plants, machines,
office etc. and financial resources like funds to be able to produce and supply goods and services
to customers.

 Earning profits- Refers to earnings in relation to capital investment. Must earn a reasonable
profit which is very important for business’s survival and growth.

 Manager performance and development- Enterprises need managers to conduct and

coordinate business activity. Various programmes need to be implemented for motivating the
managers. Must actively work for this purpose.

 Worker’s performance and attitude- determines their contribution towards productivity and
profitability of any enterprise. It should also try to ensure a positive attitude on the part of
workers.

 Social Responsibility- Refers to the obligation of business firms to contribute resources for
solving social problems and work in a socially desirable manner.
BUSINESS RISKS

 Refers to possibility of inadequate profits or losses due to uncertainties or unexpected events.

Ex- Demand for a particular product may decline due to change in tastes and preferences of
consumers, or due to increased competition from other producers.
 Speculative risk- involve both possibility of gain and loss.
Arise due to changes in market conditions, including fluctuations in demand and supply,
changes in prices, fashion, tastes of customers.
 Pure risk- involve only possibility of loss. Chance of fire, theft or strike are examples.

NATURE OF BUSINESS RISKS

 Business risks arise due to uncertainties- Refers to lack of knowledge on what will happen
in the future. They create risks for business because outcomes of the future events are
unknown.
Ex- Natural calamities, change in demand and prices, improvement in technology.

 Risk is an essential part of every business- No business can avoid risk, can vary from
business to business. Risk can be minimized, but not eliminated.

 Degree of risk depends upon nature and size of business- Types of goods and services
produced, and volume of production and sale, are the main factors determining risk of
business.
Ex- Business dealing in fashionable items has high degree of risk. Large scale business has
higher risk than small scale.

 Profit is the reward for risk taking- Greater the risk involved, higher is chance of profit. An
entrepreneur undertakes risk under the expectation of higher profit.

CAUSES OF BUSINESS RISKS

 Natural causes- Human beings have little control over natural calamities, like flood,
earthquake, lightning etc.

 Human causes- Includes unexpected events like dishonesty, carelessness, strikes, riots,
management inefficiency etc.

 Economic causes- Includes uncertainties relating to demand for goods, competition, price,
collection of dues from customers, change in MOP etc.
Financial problems like rise in interest rate for borrowing, levy of higher taxes, results in
higher unexpected cost of operation or business.

 Other causes- Unforeseen events like political disturbances, and mechanical failures such as
bursting of boiler, fluctuations in exchange rates etc.