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

MULTIPLE CHOICE QUESTIONS

Q.1. Which of the following does not characterize a 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)
Solution.
Salary or wages is not a characteristic of business. In a business activity, the entrepreneurs work for themselves, solely for the profit motive. A business involves production and exchange of goods and services. Risk is also involved in carrying on a business because of the unpredictable events associated with it.
Hence, the correct answer is option (d).

Q.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)
Solution.
An oil refinery and a sugar factory are categorized as secondary industries as their raw materials (crude oil and sugarcane) are processed into finished goods (oil and sugar).
Hence, the correct answer is option (b).

Q.3. Which of the following cannot be classified as an auxiliary to trade?
(a) Mining 
(b) Insurance
(c) Warehousing 
(d) Transport
Ans. (a)
Solution.
Mining cannot be classified as an auxiliary to trade. This is because it does not facilitate trade but in fact forms the basis of trade. Mining is classified as a primary industry as it involves the extraction of natural resources.
Hence, the correct answer is option (a).

Q.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)
Solution.
Employment is a business activity in which people are hired and are remunerated in return. Those engaged in a business or a profession work with the main motive of earning a profit for themselves.
Hence, the correct answer is option (b).

Q.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)
Solution.
Tertiary industries provide facilities to primary and secondary industries, such as transport and banking, to enable them to function.
Hence, the correct answer is option (d).

Q.6. Which of the following cannot be classified as an objective of business?
(a) Investment
(b) Productivity
(c) Innovation
(d) Profit earning
Ans. (a)
Solution.
Investment is not an objective of business. Rather, it is a basic requirement of every business. It is the profit motive that serves as the sole objective of every business activity. Business enterprises also need to improve their productivity and engage in research and development activities for innovating new products to be able to sustain themselves in the market. Thus, increasing productivity, innovating and earning a profit are objectives of business. However, investment cannot be considered as a business objective.
Hence, the correct answer is option (a).

Q.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)
Solution.
Good management enables an enterprise to achieve new milestones and does not bring on a business risk. Changes in government policy, dishonesty on the part of employees and power failure can lead to losses and thus are considered business risks.
Hence, the correct answer is option (b).

SHORT ANSWER TYPE QUESTIONS

Q.1. State the different types of economic activities.
Ans. The different types of economic activities are:
(a) Business: It basically involves trading of goods and services on a regular basis. The sole motive with which a business is conducted is profit.
(b) Profession: A profession is an occupation that requires highly specific and in-depth knowledge of the relevant field. Every profession is different from another in terms of the knowledge and skills required to practice it. For instance, a doctor cannot engage in the profession of an engineer.
(c) Employment: In this type of economic activity people are hired by organisations to work on a regular basis and are paid in exchange of their services. Normally, a monthly salary is paid. The payments are generally in monetary terms along with certain non-monetary compensations such as perks and other types of allowances. The remuneration paid to blue-collar employees (basically, workers) is termed ‘wages’, while the remuneration paid to white-collar employees (particularly, officers) is termed ‘salary’. All the employees of an organisation work together for the achievement of the common goals.

Q.2. Why is business considered an economic activity?
Answer: Business is primarily undertaken with an objective to earn money to finance one’s livelihood. It can be said that the sole motive with which a business is run is profit. That means, the decision to carry-out a business is not out of love or to perform charitable activities. Hence, business is considered an economic activity.

Q.3. Explain the concept 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 any occupation in which people regularly engage in an activity with an objective of earning profit. The activity may consist of production or purchase of goods for sale, or exchange of goods or supply of services to satisfy the needs of other people in the society.

Q.4. How would you classify business activities?
Ans. The business activities can be classified as:
(a) Industry: It refers to economic activities, which are connected with conversion of resources into useful good s. These include activities relating to producing or processing of goods as well as breeding and raising of animals. Among the major activities that are performed by an industry are production, processing and manufacturing. Industries are classified into the three categories as primary, secondary and tertiary.
(b) Commerce: Unlike industry, commerce does not involve manufacturing or production. It basically involves trading and its related activities. It includes both, buying and selling of goods as well as auxiliaries such as transport, banking, etc. It provides the necessary link between producers and consumers. It includes all those activities, which are necessary for maintaining a free flow of goods and services.

Q.5. Explain any two business activities which are auxiliaries to trade.
Ans. Auxiliaries to trade include trade-related activities which facilitate the exchange of goods and services. Among the major auxiliaries to trade, a few are transportation, advertisement, packaging, warehousing, banking and communication. The following are two business activities which are auxiliaries to trade.
(a) Banking and finance: Finance is the most important input to run any business. Purchasing raw materials and meeting day-to-day expenses demand finance. Besides the availability of the right amount of funds, their easy and cheap availability is also equally important. In today’s world, where a majority of trading activities are conducted on credit, the need for finance is immense. This is because, as goods are sold on credit, the funds that are invested are not realized until the sale proceeds are ultimately received by the producer or the trader. Thus, the absence of a banking and finance system can obstruct the free movement of goods. In these contexts, an efficient banking facility ensures the easy and ready availability of cheap credit to businessmen and traders, and thus acts as an auxiliary to trade.
(b) Advertising: We all know the importance of advertisement in today’s world. It is through advertisements that businesspersons are able to reach a large number of potential buyers. Advertisements through television, the Internet, newspapers, the radio and various other media educate the buyers and make them more aware of the goods on sale. Advertising helps businesspersons to increase their sales and hence plays the role of an auxiliary to trade.

Q.6. What is the role of profit in business?
Ans. Earning a profit is the sole motive of any business activity. It is not possible for a business to sustain itself for a long time if it does not earn sufficient profits. This is because, for a business to continue, a pa rt of profit has to be reinvested in the business. Reinvestment also ensures the growth prospects of a business and enhances its future profit-earning capacity. Profits are regarded as the reward for undertaking the risks associated with a business. If a business is not earning profits, then it is considered a non-viable venture.

Q.7. What is business risk? What is its nature?
Ans. Business risk is the possibility of failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond the control of a business. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a business person to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand, the businessperson would earn lower profits.
Nature of Business Risk 
(i) Risk is part and parcel of business- Risk is an essential feature of a business. Every business, irrespective of its size and nature, whether organised or unorganised, faces risk.
(ii) Varying degree- The extent of risk that a business faces depends upon the nature or type of goods produced and the scale of operation. A business that produces goods of daily use, such as soap and toothpaste, faces a lower business risk than a business that produces goods which are highly dependent on consumer preferences, such as cell phones. Similarly, a business operating on a large scale (i.e., a large business firm) faces a higher business risk compared to a small-scale business.
(iii) Directly related with profit- We know that profit is the reward for undertaking business risk. The higher the degree of risk involved, the higher would be the amount of profit earned and vice versa.
(iv) Results due to unforeseen circumstances- Risks emerge because of unforeseen circumstances and uncertainties. Unforeseen circumstances may include strikes and thefts (termed ‘human uncertainties’) or business uncertainties—such as price change, changes in government policies and natural disasters, such as earthquake and floods.

LONG ANSWER TYPE QUESTIONS

Q.1. Explain the characteristics of business.
Ans. The characteristics of business are:
(i) Economic Activity: The sole purpose of an business activity is to make money to earn livelihood.
(ii) Sale or exchange of goods and services: Business basically involves sale or exchange of goods and services for a value between the seller and the buyer.
(iii) 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.
(iv) Profit earning: The main aim of any business activity is to make profit. No business can survive for long without earning profit.
(v) Uncertainty of return: It 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 to earn money but it is not certain as to what amount of profit will be earned or losses may also occur.
(vi) Element of risk: Risk is the uncertainty associated with an exposure to loss. It is caused by some unfavorable or undesirable event. No business can altogether do away with risks.

Q.2. Compare business with profession and employment.
Ans. Economic activities may be divided into three major categories:  
(a) Business refers to those economic activities, which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit. People engaged in business earn income in the form of profit.
(b) Profession includes those activities, which require special knowledge and skill to be applied by individuals in their occupation. Those engaged in professions are known as professionals and are generally subject to guidelines or codes of conduct laid down by professional bodies. Example: Lawyers are engaged in the legal profession, governed by the Bar Council of India and Chartered Accountants belonging to the accounting profession are subject to the regulations of the Institute of Chartered Accountants of India.
(c) Employment refers to the occupation in which people work for others and get remunerated in return. Those who are employed by others are known as employees. Thus, people who work in factories, offices of banks, insurance companies or government department, etc. are the employees of these organisations as they receive wages and salaries.

Q.3. Explain with examples the various types of industries.
Ans. The various types of industries are:
(a) Primary Industries: These industries basically undertake activities related to the extraction and processing of natural resources. These industries directly use natural resources as their raw materials and convert them into a consumable form. Agriculture, mining, fishing, etc., are among the activities undertaken by primary industries. Based on the nature of the activities performed, primary industries can be classified as ‘extractive’ or ‘genetic’ industries.
(i) Extractive industries: These industries deal with extraction and refinement of natural resources. The products of these industries serve as raw materials for other industries, which further process these products into useful goods. Agriculture, fisheries, mining, etc., are among the extractive industries.
(ii) Genetic industries: These industries remain engaged in breeding plants and animals for their use in further reproduction. Example: Seeds and nursery industries and poultry farming.
(b) Secondary industries: These industries, also known as manufacturing industries, acquire raw materials (i.e., the final products of primary industries) and convert them into final goods after further processing and value-addition. In other words, these industries aim at making the raw materials that they procure more readily consumable by the final consumer.

Secondary industries can be further classified in the following manner
(i) Manufacturing industries: These industries further process raw materials or semi-finished goods into finished products that can be readily used by the final consumer. On the basis of the method of production used by manufacturing industries, they can be further divided into four main categories.
1. Analytical industries: These industries analyses a single product (raw material) and then refine and separate different elements from it to prepare their final products. For example, an oil refinery is an analytical industry in which different products are segregated from crude oil as petroleum, wax, paraffin, etc.
2. Synthetic industries: Synthetic industries combine different raw materials (which serve as ingredients) to produce a completely new product. For instance, a cosmetic cream industry combines various ingredients such as calamine and perfume extracts to produce a final product.
3. Processing industries: In processing industries, the raw material is processed and refined in various stages and converted into the final product. Among the prominent examples of processing industries are the sugar and paper industries.
4. Assembling industries: These types of industries combine various smaller components to form a new final product. As against synthetic industries that combine different raw materials to prepare a new product, assembling industries combine parts that are final products in themselves to produce a new product. The electronics goods industry is an example of an assembling industry.
(ii) Construction industries: These industries are concerned with the construction and development of infrastructure such as buildings, bridges, dams and roads. 
(c) Tertiary Industries: These industries are regarded as a lifeline of an economy and act as the basic facilitators for the operation of primary and secondary industries. Among the major services provided by tertiary industries, a few are banking and credit facilities, communication and transportation. These industries are not engaged in hardcore production activities but are basically service providers.

Q.4. Describe the activities relating to commerce.
Ans. Commerce includes two types of activities—trade and auxiliaries to trade. It mainly involves activities that bridge the gap between the producers and the sellers. Auxiliaries to trade are activities that facilitate the trading process.
The following are the various auxiliaries to trade.
(a) Banking and Finance: Finance is the most important input to run any business. The absence of a banking and finance system can obstruct the free movement of goods. An efficient banking facility ensures the easy and ready availability of cheap credit to businessmen and traders, and thus acts as an auxiliary to trade.
(b) Advertising: It is through advertisements that businessmen are able to reach a large number of potential buyers. Advertisements through television, the Internet, newspapers, the radio and other various media educate the buyers and make them more aware of the goods available. This helps businessmen to increase their sales. Hence, advertisement plays the role of an auxiliary to trade.
(c) Warehousing: It refers to the holding or preservation of goods until they are transported for final consumption. It helps businesses to store goods and facilitates the availability of goods when required.
(d) Insurance: Every business activity involves various types of risks because of the existence of factors beyond control. Insurance acts as a protection against these risks. On payment of a nominal premium, the loss suffered by a business can be recovered from the insurance company concerned.
(e) Transportation: It enables a producer to purchase raw materials and other inputs from various places and sell the final products in different regions. Transport facilitates the selling and buying of goods.

Q.5. Why does business need multiple objective? Explain any five such objectives.
Ans. Since a business has to balance a number of needs and goals, it requires multiple objectives. The objectives define in concrete terms what the business is going to do. Objectives also enable the business to analyze their own performance and take steps as necessary to improve their performance in future. Objectives are needed in every area where performance and results affect the survival and prosperity of business. The five such objectives are:
(a) Market Standing: 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 to its customers and serving them to their satisfaction.
(b) Innovation: Innovation is the introduction of new ideas or methods in the way something is done or made. There are two kinds of innovation in every business:
(i) innovation in product or service.
(ii) innovation in various skills and activities needed to supply products and services.
(c) 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.
(d) Productivity: It 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.
(e) Social responsibility: It refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner.

Q.6. Explain the concept of business risk and its causes.
Ans. Business risk is the possibility of a business failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond its control. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand. The businessperson would earn lower profits.
There are two types of business risks, namely, speculative business risk and pure business risk.
(a) Speculative business risk refers to an equal chance of earning gains or incurring losses. It arises because of changes in the external forces, such as changes in the competitor’s policies, changes in government policies, price change, and changes in consumer preferences.
(b) Pure business risk refers to the chance of either incurring only losses or incurring no loss at all. Examples of pure business risk are the risk associated with theft, fire and various natural calamities.
Causes of Business Risk
The following are the various causes of business risk.
(a) Natural causes: Unforeseen natural calamities such as earthquake, flood and famine cause heavy and irreplaceable losses to a business. The business risk that comes from natural factors is beyond the control of businesses.
(b) Economic causes: These causes are related to the uncertainties associated with changes in competitors’ policies, price change and change in consumer preferences.
(c) Human causes: These causes are related to the actions of human beings. Among the human causes of business risk are carelessness, strikes and riots.
(d) Other causes: Besides the causes mentioned above, there are a few unpredictable events that cause business risk—for example, political disturbances, exchange-rate and interest-rate fluctuations and budget amendments.

Q.7. What factors are important to be considered while starting a business? Explain.
Ans. Before starting a new business venture, an entrepreneur must carefully consider various aspects. He or she must evaluate each aspect, considering the various positive and negative consequences. The following are some of the important factors that must be considered while starting a business.
(a) Selecting the line of business: The line of business is the foremost decision that involves choosing the kind of product to produce, analyzing its existing and future market demand, profit considerations and the level of technical know how possessed by the entrepreneur.
(b) Scale of the business: Once the line of business is selected, the entrepreneur needs to decide the scale of the business, i.e., the business size, whether to operate on large scale or small scale. The choice of scale of business is made on the degree of risk embedded in
(i) The line of business
(ii) The ease of obtaining capital and
(iii) The projected demand for the product
A larger scale of business is preferred if the risk involved is low and the entrepreneur is confident about the high demand for the product. Similarly, the greater the ease of obtaining capital, the greater is the ease of operating a business on a large scale and vice versa.
(c) Location: The choice of business location is dependent on numerous factors such as easy and cheap availability of raw material and labor, well-connected transportation facilities, and power and other infrastructural facilities. Generally, locations where good infrastructure is available are preferred.
(d) Financial requirement: Finance is required for every aspect of business—from the purchase of raw material and machinery to further investment for the growth of the business. Therefore, while starting a business, the availability of alternatives to raise funds must be carefully analyzed.
(e) Efficient workforce: A competent and trained workforce is the basic input to carry on various business activities. In this regard, the entrepreneur must appropriately identify the requirement of human resources for the business, both at the worker level and at the managerial level.
(f) Physical requirements: These requirements include machinery, other equipment, tools and technology that add to the efficiency of a business. The entrepreneur must carefully consider and decide the physical requirements on the basis of the nature and production scale of the business.