Nature and Purpose of Business NCERT Solutions | Business Studies (BST) Class 11 - Commerce PDF Download

Short Answer Questions

• Resource Allocation: Businesses utilize resources to produce goods and services that fulfill people's needs.
• Profit Motive: They aim to earn profits, which drive efficiency, innovation, and economic growth.

Q2: How does business contribute to the economic development of a country?
Ans: Businesses grow economies by:

• Jobs and Income: Businesses generate employment, providing individuals with income, thereby boosting consumption and economic growth.
• Goods and Services: They produce goods and services, improving living standards.
• Innovation: Businesses foster advancements and introduce new technologies, enhancing productivity and development.

Q3: State the different types of economic activities.
Ans: Economic activities are activities undertaken to earn a living. Examples include working in factories, practicing medicine, managing offices, and teaching in schools. These activities are classified into three categories:

1. Business
2. Profession
3. Employment

Q4: State the meaning of business.
Ans: The term "business" derives from "busy." Business refers to an occupation involving regular activities related to the production, purchase, or sale of goods and services with the objective of earning money. It encompasses manufacturing, reselling, or providing services to meet consumer needs.

Q5: How would you classify business activities?
Ans: Business activities can be classified into:

1. Economic Activities: Activities performed to earn a living, such as business, profession, and employment.
2. Non-Economic Activities: Actions driven by emotions like love, sympathy, or patriotism, such as helping others or household chores without monetary motives.

Q6: What are the various types of industries?
Ans: Industries are categorized as:

1. Primary Industries: Involve extraction and reproduction of natural resources (e.g., farming, mining).
2. Secondary Industries: Use raw materials to create goods for end-users or further processing (e.g., manufacturing, construction).
3. Tertiary Industries: Provide support services like transportation, banking, and advertising to primary and secondary industries.

Q7: Explain any two business activities which auxiliaries to trade are.
Ans: The following are two business activities that are related to trade:
1. Transport and Communication: Production of goods is often region-specific. For instance:

• Tea is primarily produced in Assam.
• Cotton is grown in Gujarat and Maharashtra.
• Jute is cultivated in West Bengal and Odisha.
• Sugar is produced in Uttar Pradesh, Bihar, and Maharashtra.

However, these goods are required for consumption across the country. Transportation systems, such as roads, railways, and coastal shipping, help overcome geographical barriers by facilitating the movement of raw materials to manufacturing sites and finished products to consumers.
In addition to transport, communication plays a vital role. Effective communication systems like mail and telephone services enable producers, traders, and consumers to exchange information, ensuring smooth trade operations. Thus, both transport and communication are essential trade auxiliaries.
2. Banking and Finance: Financial resources are critical for business operations, including acquiring assets, purchasing raw materials, and covering operational expenses. Banks provide funds to businesses through facilities such as overdrafts, cash credit, loans, and advances, enabling businesses to overcome financial constraints.
Additionally, banks handle:

• Collection of cheques.
• Payment transfers to various locations.
• Bill discounting for traders.

In international trade, commercial banks assist exporters in collecting payments from importers. They also help promoters raise funds from the public, making banking and finance indispensable for supporting trade activities.

Q8: What is the role of profit in business?
Ans: A business's foundation is its objective, which defines the goals it aims to achieve. While it is widely believed that businesses exist solely for profit, this is not entirely true. Profit, which is the surplus of revenue over cost, is a critical objective but not the only one. Businesses strive to earn more than they invest, and profit plays a vital role for several reasons:

• Source of Revenue for Entrepreneurs: Profit provides income to entrepreneurs, rewarding their efforts and investments.
• Funding for Expansion: It serves as a financial resource to support the growth and diversification of a business.
• Indicator of Smooth Operations: A profitable business reflects efficient management and operational success.
• Validation of Utility: Profit signals society's approval of the business's goods or services, affirming its relevance and value.
• Reputation Building: Sustained profitability enhances a company's credibility and builds its reputation in the market. Although profit cannot be the sole purpose, its importance for sustainability and growth cannot be underestimated.

Q9: What is meant by business risk?
Ans: Business risk refers to the probability of reduced profits or losses due to unforeseen events. For instance:

• Changes in consumer preferences may lower product demand.
• Scarcity of raw materials can increase costs and reduce profit margins.

Risks are classified as:

1. Speculative Risks: Arise from market conditions and can result in profit or loss (e.g., price changes, competition).
2. Pure Risks: Only lead to loss or no loss (e.g., fire, theft, strikes).

Q10: State the causes of risks involved in business?
Ans: Business risks arise from internal and external factors:

Internal Causes:

• Poor management decisions
• Inefficient operations
• Lack of innovation
• Financial mismanagement

External Causes:

• Economic recessions
• Regulatory changes
• Raw material price fluctuations
• Consumer preference shifts
• Competitive advancements in technology
• Natural disasters and unforeseen events

Long Answer Questions

1. Guaranteed unconditional payment of money.
2. Facilitated monetary commitments or orders.

As banking practices evolved, individuals began depositing precious metals with lenders, known as Seths, who acted as early bankers. This system transformed money into a tool for increasing production, simplifying business operations through credit facilities, loans, and advances. The indigenous banking system supported a favorable trade balance by providing capital to manufacturers, traders, and merchants. Agricultural banks offered short- and long-term loans to farmers, while commercial and industrial banks emerged to support trade and commerce.

Q2: Define business. Describe its important characteristics.
Ans: The term "business" originates from the concept of being "busy." In essence, business refers to any occupation involving activities such as the production, purchase, or sale of goods and services with the intent to earn profit. The scope of activities includes manufacturing, purchasing for resale, and service provision to fulfill consumer needs.

Key Characteristics of Business:

1. Production or Procurement of Goods and Services: Businesses must manufacture or procure goods before offering them to consumers. Goods may include consumables like sugar and notebooks or capital items like machinery. Services, such as banking and transportation, are provided to meet consumer or organizational needs.

2. Sale or Exchange of Goods and Services: The exchange of goods or services for monetary value is fundamental. Activities for personal use, such as cooking food at home, do not qualify as business; however, cooking food in a restaurant for sale does.

3. Regular Dealings in Goods and Services: Business activities involve regular transactions. Isolated transactions, like selling a personal radio set, do not constitute business, whereas consistent sales, like running a radio shop, do.

4. Profit Earning: Profit is a primary objective, essential for sustainability. Businesses aim to maximize profits through increased sales or cost reduction.

5. Uncertainty of Return: Business income is unpredictable, with potential for both profits and losses, regardless of effort.

6. Element of Risk: Risks stem from factors like market competition, consumer preferences, or unforeseen events such as theft, accidents, or natural disasters.

Q3: Compare business with profession and employment.

Ans: The comparison between business, profession, and employment is summarized below:

Q4: Define Industry. Explain various types of industries giving examples.
Ans: Industry refers to economic activities involving the transformation of raw materials into usable products. It encompasses manufacturing, processing, and activities like animal breeding. Industries are categorized as follows:

1. Primary Industries:
These involve the extraction and production of natural resources or the reproduction of living organisms.

• Extractive Industries: Extract goods from nature, such as mining, fishing, and farming.
• Genetic Industries: Focus on breeding plants and animals for reproduction, like poultry farms or seed nurseries.

2. Secondary Industries:
Use raw materials to produce goods for consumption or further processing.

• Manufacturing Industries: Convert raw materials into finished goods, e.g., textile production.
• Construction Industries: Build infrastructure like roads, dams, and bridges.

3. Tertiary Industries: Provide services and support for primary and secondary industries, including transportation, banking, and advertising.
Q5: Describe the activities relating to commerce.
Ans: Trade is a key part of business. It involves selling, transferring, or exchanging goods. It helps to deliver products made to customers or users. 
Trade can be split into two types: 

• Internal Trade: This refers to buying and selling goods and services within the borders of a country. 
• External Trade: This involves exchanging products and services between individuals or businesses in different countries. 

Auxiliaries to Trade: Auxiliaries to trade are activities that support trade. They play an important role in business and help overcome challenges in producing and distributing goods. 
Here are some key auxiliaries to trade: 

• Transport and Communication: Most products are made in specific areas. Transport helps move raw materials to factories and finished goods to customers. Communication allows producers, traders, and consumers to connect. 
• Banking and Finance: Businesses need money to buy assets, raw materials, and cover other expenses. Banks provide necessary funds, helping businesses deal with financial issues. Common services include loans, overdrafts, and handling payment collections. 
• Insurance: Business involves various risks. Factories, machinery, and goods need protection from fire, theft, and other dangers. Insurance covers these risks, ensuring that businesses and employees are safeguarded. 
• Warehousing: Goods are often not sold immediately after production. They are stored until needed. Proper warehousing solutions help prevent loss or damage and ensure products are available when required. 
• Advertising: Advertising is a powerful method to encourage sales, especially for consumer products like electronics and household items. Since producers and traders cannot reach every customer directly, advertising helps inform potential buyers about products, their features, and prices. 

Q6: Explain any five objectives of business.
Ans: The following are the business objectives:
Market Position: The market position of a company refers to its standing relative to competitors. The primary goal should be to secure a stronger position by offering competitive products and meeting customer needs effectively.
Innovation: Innovation involves introducing new ideas or methods in business operations or product development. It can take two forms:

• Product or Service Innovation
• Supply Chain Innovation

Innovation is essential for business survival in a competitive environment and is a critical objective for sustained growth.

• Productivity: Productivity measures the efficiency of converting inputs into outputs. To ensure long-term success, businesses must strive to maximize productivity by utilizing available resources effectively and efficiently.
• Physical and Financial Resources: Businesses need physical resources like plants, machinery, and offices, along with financial resources like capital, to operate. The objective should be to acquire these resources as per business needs and utilize them optimally for producing and selling goods or services.
• Profit Earning: Profitability is a key driver for business sustainability and growth. Profits represent the returns on invested capital, and earning a reasonable profit is essential to ensure survival, expand operations, and achieve financial stability.

Q7: Explain the concept of business risk and its causes.
Ans: The term "business risks" refers to the likelihood of reduced profits or even losses due to unforeseen or unpredictable events. For instance, a drop in demand for a product might occur because of shifts in consumer preferences or increased competition. This decline in demand can lead to decreased sales and profits. Similarly, a scarcity of raw materials may raise costs, forcing businesses to pay more, thereby increasing production expenses and reducing earnings.

Types of Business Risks:

1. Speculative Risks: These arise from changes in market conditions, including fluctuations in demand and supply, price variations, or shifts in consumer preferences and fashion. Favorable conditions may lead to profits, while unfavorable ones may result in losses.
2. Pure Risks: These have only two possible outcomes: loss or no loss. Examples include risks like fire, theft, or strikes. Their occurrence causes loss, while their absence ensures no loss but does not lead to gain.

Causes of Business Risks:

1. Natural Causes: These include uncontrollable natural disasters such as floods, earthquakes, lightning, torrential rain, or famines, which disrupt business operations.
2. Human Causes: Risks arising from human actions, such as employee dishonesty, negligence, strikes, riots, management inefficiency, or work stoppages due to power outages, fall into this category.
3. Economic Causes: These involve factors like demand fluctuations, market competition, price changes, and shifts in production technologies. Financial issues, such as rising interest rates or increased taxes, also contribute to economic risks by escalating operational costs.
4. Other Causes: Risks from unforeseen events, such as political instability, technical malfunctions (e.g., boiler explosions), or fluctuations in currency exchange rates, also pose significant challenges to businesses.

Q8: What factors are to be considered while starting a business? Explain.
Ans: The following are some things to consider while starting a business:

1. Line-of-Business Selection: The first step is to decide the type and nature of business to pursue. Entrepreneurs should focus on fields with significant profit potential, aligning with market demands and their technical expertise or interest in a particular product.

2. Size of the Firm: The scale of the business is another critical decision. A large-scale business may be appropriate if demand is stable, financing is assured, and risks are manageable. Conversely, a small-scale setup suits uncertain markets and higher risks.

3. Choice of Ownership Structure: Businesses can operate as sole proprietorships, partnerships, or joint stock companies. Each structure has distinct advantages and challenges. The choice depends on factors such as capital needs, liability, profit distribution, legal formalities, and continuity of the business.

4. Business Location: The location of the business impacts production costs, access to resources, and service quality. Considerations include proximity to raw materials, labor, power, and essential services like banking, transport, and warehousing.

5. Funding the Proposal: Securing financial resources for starting and running the business is crucial. Entrepreneurs need to:

   • Assess the required capital.
   • Identify funding sources.
   • Develop strategies for efficient capital utilization.

6. Physical Facilities: Arranging machinery, equipment, buildings, and related services is essential. These depend on the business's nature, scale, available funds, and production processes.

7. Plant Layout: A detailed layout plan is necessary for organizing physical facilities. This includes the arrangement of machinery and equipment to optimize production efficiency.

8. Workforce: A skilled and motivated workforce is vital. Entrepreneurs should evaluate the need for trained and untrained staff, administrative personnel, and implement plans for training and motivation to ensure optimal performance.

9. Tax Preparation: Tax planning is increasingly important due to its impact on business operations. Entrepreneurs must assess tax liabilities under various laws and account for their effects on financial planning.

10. Starting the Business: Once these decisions are made, the business can be launched by mobilizing resources, completing legal formalities, starting production, and implementing a sales promotion strategy.