EXERCISES
Short Answer Questions
Q1: Why is business considered as economic activity?
Answer: Business is considered an economic activity because it is undertaken with the primary aim of earning money or livelihood, not out of emotion or sentiment. It involves the production, distribution, and exchange of goods and services for value.
Q2: How does business contribute to the economic development of a country?
Answer: Business contributes to economic development by generating surplus income, fostering various economic activities, creating employment, promoting trade (both internal and external), enabling technological advancements, and supporting overall prosperity and growth. Historically, robust business and trade have led to significant wealth and development.
Q3: State the different types of economic activities.
Answer: The different types of economic activities are:
- Business
- Profession
- Employment
Q4: State the meaning of business.
Answer: Business refers to an economic activity that involves the regular engagement in the purchase, production, and/or sale of goods and services with the primary objective of earning profit.
Q5: How would you classify business activities?
Answer: Business activities are broadly classified into two main categories:
- Industry: Activities concerned with the extraction, production, processing, and construction of goods.
- Commerce: Activities that facilitate the exchange of goods and services, including trade and auxiliaries to trade.
Q6: What are the various types of industries?
Answer: Industries are classified into three main types:
- Primary Industries: Extract or produce natural resources, or are involved in breeding and development of living organisms (e.g., Extractive, Genetic).
- Secondary Industries: Use materials from primary industries to produce goods (e.g., Manufacturing, Construction).
- Tertiary Industries: Provide support services to primary and secondary industries and facilitate trade (e.g., Transport, Banking, Insurance).
Q7: Explain any two business activities which are auxiliaries to trade.
Answer: Two business activities that are auxiliaries to trade are:
- Transport: Removes the hindrance of place by moving goods from their place of production to markets where they are demanded by consumers.
- Warehousing: Removes the hindrance of time by storing goods safely until they are needed by customers, bridging the time gap between production and consumption.
Q8: What is the role of profit in business?
Answer: The role of profit in business is crucial for:
- Source of income for business owners
- Source of finance for business expansion and growth
- An indicator of the efficiency and performance of the business
- Building and maintaining the reputation and goodwill of the business
- Ensuring the long-term survival of the business
Q9: What is meant by business risk?
Answer: Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. It is the uncertainty associated with potential loss and the exposure to various internal and external factors that can negatively impact a business.
Q10: State the causes of risks involved in business.
Answer: The causes of risks involved in business include:
- Natural Causes: Natural calamities like floods, earthquakes, famines, etc.
- Human Causes: Employee dishonesty, strikes, riots, negligence, or mismanagement.
- Economic Causes: Changes in demand, prices, competition, technological changes, or economic recession.
- Political Causes: Government policies, political instability, or changes in laws.
- Other Causes: Mechanical failures, management inefficiency, or uninsurable risks.
Long Answer Questions
Q1: Discuss the development of indigenous banking system in Indian subcontinent.
Answer:
The Indian subcontinent has a rich history of an indigenous banking system, which developed concurrently with robust trade activities. Ancient trading routes (both land and water, like the Silk Route) fostered significant economic surplus. This surplus necessitated and facilitated the growth of local banking practices.
Key aspects of its development include:
Use of Hundis and Chitties: These were traditional credit instruments that served as bills of exchange or promissory notes, enabling safe and convenient transfer of funds across distances. This eliminated the need to carry large sums of money, facilitating trade.
Lending and Credit Facilities: The system provided loans and advances, crucial for financing commercial operations and facilitating larger transactions.
Merchants and Shroffs: Indigenous bankers, often referred to as ‘Shroffs,’ played a significant role. They acted as money changers, accepted deposits, lent money, and provided various other banking services, becoming integral to the commercial life of the subcontinent.
Financial Facilitation: The banking system provided the necessary financial infrastructure, supporting manufacturers, traders, and merchants, and contributing to India’s historical favorable balance of trade. This robust system was crucial for India’s prosperity, leading to its reputation as ‘Swaran Bhoomi and Swaran Deep’ (Land and Island of Gold).
Q2: Define business. Describe its important characteristics.
Definition of Business: Business is an economic activity that involves the systematic and regular production or procurement and sale or exchange of goods and services with the primary motive of earning profit, while also bearing inherent risks and uncertainties.
Important Characteristics of Business:
- An Economic Activity: Business is always undertaken with the objective of earning money or livelihood, distinguishing it from non-economic activities driven by sentiment or emotion.
- Production or Procurement of Goods and Services: Businesses either produce (manufacture) goods themselves or procure (buy) them from producers to sell to consumers. Goods can be tangible (e.g., clothes, machinery) or intangible services (e.g., transport, banking).
- Sale or Exchange of Goods and Services: A fundamental characteristic is the transfer or exchange of goods and services for some value (money). Production for self-consumption does not constitute business.
- Dealings in Goods and Services on a Regular Basis: Business implies regularity of transactions. A single transaction of buying and selling, even if for profit, does not make it a business. It requires continuous or repeated dealings.
- Profit Earning: The primary and essential objective of any business. Without the prospect of earning profit, no individual would engage in business, and no business can survive or grow in the long run.
- Uncertainty of Return: There is always an element of unpredictability regarding the amount of profit a business will earn. Profits are not guaranteed, and there is always a possibility of incurring losses.
- Element of Risk: Business inherently involves risk, which is the uncertainty associated with potential loss. Risks arise from various factors like changes in consumer preferences, competition, natural calamities, strikes, etc. While risks can be managed, they cannot be entirely eliminated.
Q3: Compare business with profession and employment.
Answer: Economic activities can be clearly distinguished based on several factors:
| Basis | Business | Profession | Employment |
|---|---|---|---|
| Mode of Establishment | Starts with an entrepreneur’s decision and completion of legal formalities, if any. | Requires membership in a professional body and a certificate of practice. | Commences upon receiving an appointment letter and entering into a service agreement. |
| Nature of Work | Involves the provision, production, acquisition, and sale of goods and services. | Involves rendering personalized services of a specialized, expert nature. | Performing work as per the terms and conditions outlined in a service contract or rules. |
| Qualification | No specific minimum qualification is legally necessary, though knowledge is beneficial. | Prescribed qualifications, specialized knowledge, and training from a recognized body are mandatory. | Qualification and training are determined and prescribed by the employer. |
| Reward/Return | The return is primarily profit earned from business operations. | The return is typically a professional fee charged for services rendered. | The return is a fixed salary or wages paid by the employer. |
| Capital Investment | Capital is required, varying significantly based on the size and nature of the business. | Limited capital is generally needed for setting up a professional practice (e.g., office). | No capital investment is required by the employee. |
| Risk | High risk due to uncertain and irregular profits, with a possibility of losses. | The fee is generally regular and more certain; risk is comparatively low. | Minimal or no risk for the employee, as remuneration is fixed and regular. |
| Transferability | The ownership of a business can be transferred with necessary legal formalities. | The profession itself (e.g., a doctor’s expertise) cannot be transferred to another person. | Employment cannot be transferred from one person to another. |
| Code of Conduct | No formal code of conduct is prescribed, though ethical practices are expected. | Professional bodies lay down a strict code of conduct that members must adhere to. | The norms of behavior and discipline are set and enforced by the employer. |
| Example | Operating a retail shop, running a factory. | A doctor, lawyer, chartered accountant. | Working as a bank manager, a government employee. |
Q4: Define Industry. Explain various types of industries giving examples.
Definition of Industry: Industry refers to economic activities that are concerned with the extraction, production, processing, or construction of goods and services. It typically involves the application of mechanical appliances and technical skills to transform resources into useful products. The term also broadly refers to a group of firms producing similar or related goods.
Various Types of Industries:
Industries are primarily categorized into three types:
1. Primary Industries
These industries are concerned with the extraction and production of natural resources and the reproduction or development of living organisms. They provide the basic raw materials or foundational products.
A. Extractive Industries: Engaged in extracting products from natural sources. They supply basic raw materials that are largely products of the geographical environment.
- Examples: Farming (agriculture), Mining (coal, iron ore), Lumbering (timber extraction), Hunting, Fishing.
B. Genetic Industries: Engaged in the breeding of plants and animals for their further reproduction and multiplication.
- Examples: Plant nurseries (for seeds and saplings), Cattle breeding farms, Poultry farms, Fish hatcheries.
2. Secondary Industries
These industries utilize the materials produced by primary industries as their raw inputs and process them to produce goods for final consumption or for further processing by other industries.
A. Manufacturing Industries: Engaged in the process of converting raw materials or semi-finished goods into finished products, thereby creating form utility. They transform materials into diverse finished goods through various processes.
Examples of types of Manufacturing Industries:
- Analytical Industry: Analyzes and separates different elements from the same basic material. Example: Oil refinery (separating petrol, diesel, kerosene from crude oil).
- Synthetical Industry: Combines various ingredients or raw materials to create a new product. Example: Cement industry (combining limestone, clay, gypsum).
- Processing Industry: Involves successive stages through which raw materials pass to become finished products. Example: Sugar industry (from sugarcane to sugar), Paper industry (from pulp to paper).
- Assembling Industry: Assembles different component parts, which are often manufactured by other industries, to make a new, finished product. Example: Television manufacturing, Car manufacturing, Computer manufacturing.
B. Construction Industries: Involved in the construction of infrastructure and buildings. These industries are characterized by the immobility of their finished product.
- Examples: Building construction, Construction of dams, bridges, roads, tunnels, and canals.
3. Tertiary Industries (Service Industries)
These industries provide support services to primary and secondary industries, as well as to trade, and facilitate the smooth functioning of business activities. They are also referred to as auxiliaries to trade.
- Examples: Transport (movement of goods), Banking (financial services), Insurance (risk coverage), Warehousing (storage), Communication (information exchange), Packaging, Advertising.
Q5: Describe the activities relating to commerce.
Answer:
Commerce encompasses all those activities that facilitate the purchase, sale, and exchange of goods and services, bridging the gap between producers and consumers. It involves two main categories of activities: Trade and Auxiliaries to Trade (Services).
1. Trade
Trade simply means the buying and selling of goods. It effectively removes the hindrance of ‘persons’ by making goods available from producers to consumers.
A. Internal Trade (Home Trade): Buying and selling of goods within the geographical boundaries of a country.
- Wholesale Trade: Buying goods in large quantities from manufacturers and selling them in smaller quantities to retailers.
- Retail Trade: Buying goods from wholesalers or manufacturers and selling them directly to the final consumers in small quantities.
B. External Trade (Foreign Trade): Buying and selling of goods between two or more countries.
- Import Trade: Purchasing goods from a foreign country.
- Export Trade: Selling goods to a foreign country.
- Entrepot Trade: Importing goods for the purpose of exporting them to another country without significant processing.
2. Auxiliaries to Trade (Services)
These are services that facilitate the smooth flow of goods and services from producers to consumers by removing various hindrances. They are essential for modern business.
Transport: Removes the hindrance of ‘place’. It facilitates the movement of raw materials to the production sites and finished goods from factories to markets and consumers.
Warehousing: Removes the hindrance of ‘time’. It provides storage facilities for goods, ensuring they are available when needed, bridging the gap between production and consumption.
Insurance: Removes the hindrance of ‘risk’. It provides protection against potential losses or damages to goods (e.g., during transit or storage), property, or life due to various perils like fire, theft, or accidents.
Banking and Finance: Removes the hindrance of ‘finance’. Banks provide the necessary funds (loans, credit) for business operations, working capital, and investment, as well as facilitating payments and remittances.
Communication: Removes the hindrance of ‘information’. Services like postal services, telephone, internet, and other telecommunication networks enable effective exchange of information between producers, traders, and consumers.
Advertising and Public Relations: Removes the hindrance of ‘information’ and ‘persuasion’. Advertising informs potential customers about products and services, creating awareness and demand, while public relations builds a positive image for the business.
Packaging: Essential for protecting goods, facilitating transportation, and often serving as a marketing tool.
In summary, commerce ensures that goods and services are made available to the right people, at the right place, at the right time, with adequate financial backing, reduced risk, and necessary information.
Q6: Explain any five objectives of business.
Answer:
While profit is often seen as the sole objective of business, a business actually requires multiple objectives to ensure its long-term survival, growth, and sustainability. These objectives guide a business’s actions and ensure it addresses various stakeholder needs.
1. Profit Earning
This is the most fundamental and primary objective for any business. Profit is the difference between total revenue and total cost. It is essential not just as a reward for the entrepreneur’s risk-taking but also as the main source of funds for expansion, modernization, and innovation. Without sufficient profits, a business cannot survive in the long run, pay its employees, or attract investors.
2. Market Standing (or Market Share)
This objective refers to the position of a business in relation to its competitors in the market. It involves establishing goodwill, maintaining a good reputation, and ensuring a significant share of the market for its products or services. A strong market standing implies customer loyalty, brand recognition, and a competitive advantage.
3. Innovation
Innovation involves the introduction of new ideas, methods, products, or services, or significant improvements to existing ones. This could be innovation in product design, production processes, marketing strategies, or even management techniques. In a dynamic market, innovation is crucial for staying relevant and competitive.
4. Productivity
Productivity measures how efficiently a business is utilizing its resources (labor, capital, raw materials) to produce goods or services. It is often measured as output per unit of input. The objective is to maximize output with minimum resource consumption or to continuously improve the ratio of output to input.
5. Manager Performance and Development
This objective focuses on cultivating competent and motivated managers. It involves providing opportunities for their professional growth, training, and development to enhance their skills and leadership qualities. Effective management is critical for planning, organizing, directing, and controlling business operations.
Q7: Explain the concept of business risk and its causes.
Concept of Business Risk:
Business risk refers to the possibility of suffering losses or earning inadequate profits due to uncertainties associated with business operations. These uncertainties arise from various factors that cannot be perfectly foreseen or controlled, leading to deviations from expected outcomes. Essentially, it is the chance of something negative happening that could impact a business’s objectives, financial health, or operational continuity. The greater the potential for loss, the higher the risk. Risk is an inherent and unavoidable aspect of business, but it can be managed to some extent.
Causes of Business Risks:
Business risks stem from a variety of sources, which can be broadly categorized as follows:
1. Natural Causes
These risks arise from unforeseen natural calamities or environmental changes that are beyond human control. They can cause extensive damage to property, goods, and even lives.
Examples: Earthquakes, floods, droughts, famines, cyclones, volcanic eruptions, lightning, heavy rains, and other natural disasters.
2. Human Causes
These risks originate from human behavior, actions, or inactions within or outside the business. They can be due to negligence, dishonesty, or deliberate acts.
Examples: Employee dishonesty (theft, embezzlement), strikes or lockouts by workers, riots, negligence by employees (leading to accidents or waste), mismanagement, power failures, or careless handling of resources.
3. Economic Causes
These risks are associated with changes in the economic environment and market conditions that affect the demand for products, prices, and the overall economic landscape.
Examples: Fluctuations in demand for goods (e.g., due to changes in consumer tastes, fashion), changes in prices of raw materials or finished goods, increased competition, technological changes (making existing products obsolete), changes in government policies (e.g., taxation, trade policies), inflation or deflation, and economic recession or boom.
4. Political Causes
Risks arising from changes in political stability, government policies, or legislative frameworks within a country or internationally.
Examples: Changes in government regulations, political instability, war, civil unrest, nationalization of industries, changes in trade agreements, or new laws that impact business operations.
5. Other Causes (Miscellaneous/Unforeseen)
This category includes risks that do not fit neatly into the above categories but can still significantly impact a business.
Examples: Mechanical failures or breakdown of machinery, industrial accidents, unforeseen operational contingencies, sudden exchange rate fluctuations, or global pandemics.
Q8: What factors are to be considered while starting a business? Explain.
Answer:
Starting a business is a complex process that requires careful planning and consideration of various factors to ensure its success and sustainability. Neglecting any of these factors can lead to significant challenges or even failure.
Key factors to consider:
1. Selection of Line of Business
This involves deciding the specific type of goods or services the business will offer. The choice should be based on a thorough analysis of market demand, personal interest and skills, available resources, and potential for growth. Understanding the target market and their needs is crucial.
2. Size of the Business (Scale of Operation)
This refers to the scale at which the business will operate (e.g., small-scale, medium-scale, large-scale). The decision depends on market demand, capital availability, technology involved, and the entrepreneur’s risk-taking capacity. Starting small and expanding gradually is often a safer approach.
Considerations: Market size, financial resources, management capacity, and desired level of production/service.
3. Choice of Form of Ownership
Explanation: Deciding the legal structure of the business, such as a sole proprietorship, partnership, Hindu Undivided Family (HUF), cooperative society, or company (private or public). Each form has different implications for liability, capital requirements, continuity, and ease of formation.
4. Location of Business Enterprise
The geographical placement of the business is critical. It impacts accessibility to raw materials, labor, markets, infrastructure (power, water, transport), and supporting services. A good location can significantly reduce costs and increase market reach.
5. Financial Requirements
This involves estimating the total capital needed (fixed capital for long-term assets like land, machinery; and working capital for day-to-day operations like raw materials, wages). It also includes deciding on the sources of finance (e.g., owner’s funds, loans from banks, public deposits, share capital).
6. Physical Facilities
Refers to the availability and arrangement of physical resources required for operation, including machinery, equipment, buildings, and essential services like power and water. The efficient layout of these facilities (plant layout) is crucial for smooth operations.
7. Competent and Committed Workforce
The availability of a skilled, competent, and motivated workforce is vital for any business. This involves planning for human resource needs, recruitment, training, and retention. The quality of human resources can significantly impact productivity and quality.
8. Tax Planning
Careful planning regarding the various taxes applicable to the business (e.g., income tax, GST) is essential. Proper tax planning can optimize the tax burden and ensure compliance with legal requirements.
9. Launch of the Enterprise
This is the final step, involving actual commencement of operations. It requires careful coordination of all previously planned activities, including procurement of resources, hiring staff, setting up production, and initiating marketing.