Nature and Purpose of Business - Solutions

 CBSE Class 11 Business Studies

NCERT Solutions
Nature and Purpose of Business


1. State the different types of economic activities.

Ans. Different types of economic activities are of three types:

(a) Business refers to those economic activities which are concerned with the production or purchase and sale of goods or supply of services with the main object of earning profits.

(b) Profession refers to those activities which require special knowledge and skill to be applied by individuals in their occupations.

(c) Employment refers to the occupation in which people work for others and get remunerated in return.

2. Why is business considered an economic activity?

Ans. Any activity is called an economic activity when it is done with a view to earning money. The motive of a business is to earn profit primarily. However, there are some other objectives as well like increasing market share, improvement in productivity, employee satisfaction, consumer satisfaction, social objectives, but the main and basic objective of a business is to make profits. Therefore, it is called economic activity.

3. Explain the concept of business.

Ans. Business: An economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society is called business.

Characteristics of Business

1. Economic activity: All business activities are economic activities and are done for the sole purpose of earning money.

2. Production and procurement of goods and services: A business activity involves the production or procurement of goods and services. A manufacturer is involved in production, while a shopkeeper is involved in procurement.

3. Sale and exchange of goods and services for the satisfaction of human needs: Sale and exchange of goods and services is done to satisfy human needs.

4. Dealing in goods and services on a regular basis: One time dealing in goods or services cannot be termed as a business. The business should happen on a regular basis.

5. Profit earning: Profit earning is the fundamental motive of doing a business. Other motives are there, but they depend on profit motive.

6. Uncertainty of returns: Returns can never be certain in business activity. This happens because of external factors which are outside the control of the business organization.

7. Element of risk: An element of risk is always present in business activity.

4. How would you classify business activities?

Ans. Business activities can be classified in the following ways:

I. Industry: Different types of industries are as follows:

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

2. Secondary Industry: Under this industry new products are manufactured by using the previously produced things e.g., producing cotton is a primary industry and manufacturing cloth out of cotton is a secondary industry. It is of two types.

3. Tertiary or Service Industry: It includes those services which help business to move smoothly e.g. transport, bank, insurance, storage and advertising.

II. Commerce: Commerce refers to all those activities which are concerned with the transfer of goods and services from the producers to the consumers. It embraces all those activities which are necessary for maintaining a free flow of goods and services. It includes trade and auxiliary to trade. Trade refers to buying and selling of goods and services with the objective of earning profit. It is classified into two categories.

(i) Internal Trade: It takes place within a country. Internal trade is classified into two categories-retail trade and wholesale trade.

(ii) Retail Trade: It refers to buying of goods and services in relatively small quantities and selling them to the ultimate consumers.

(a) External Trade: It happens between two or more countries. External trade can be classified into three categories.

(b) Import Trade: If goods are purchased from another country, it is called import trade.

(c) Export Trade: If goods are sold to other countries it is called export trade.

(d) Entrepot Trade: Goods are imported for export to other countries e.g.

Indian firm may import some goods from America and export the same goods to Nepal.

III. Auxiliaries to Trade: All those activities which help in removing various hindrances which arise in connection with the production and distribution of goods are called auxiliaries to trade. An overview of these activities is given below:

1. Transportation and Communication: The production of goods takes place at one place whereas these are demanded in different parts of the country. The obstacle of place is removed by the transport. Along with transport, communication is also an important service. It helps in exchange of information between producers, consumers and traders. The common communication services are postal service, telephone, fax, internet etc.

2. Banking and Finance: Business needs funds for acquiring assets, purchasing raw materials and meeting other expenses. Necessary funds can be obtained from a bank.

3. Insurance: It provides a cover against the loss of goods, in the process of transit, storage, theft, fire and other natural calamities.

4. Warehousing: There is generally a time lag between the production and consumption of goods. This problem can be solved by storing the goods in warehouses.

5. Advertising: Advertising brings goods and services to the knowledge of prospective buyers. It is through advertising that the customers come to know about the new products and their utility.

5. What are various types of industries?

Ans. Different types of industries are as follows:

1. Primary industries: These include all those activities which are concerned with the extraction and production of natural resources.

2. Secondary industries: These are concerned with using the materials which have already been extracted at the primary stage.

3. Tertiary industries: These are concerned with providing support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities.

6. Explain any two business activities which are auxiliaries to trade.

Ans. Two business activities which are auxiliary to trade are explained below:

1. Transport and communication: The production of goods generally takes place in a particular location. For instance, tea is mainly produced in Assam, but it is required for consumption in different parts of the country. The hindrance of place is eliminated by transport- road, rail or coastal shipping.

2. Advertising: Advertising is one of the most important methods of promoting the sale of products, particularly. Consumer goods such as electronic goods, automobiles. Soaps, detergents etc.

7. What is the role of profit in business?

Ans. Profits play a vital role in any business. Earning of profits is essential for any business because of the following reasons given below:

(a) Means of Livelihood: It is the most important source of income and provides livelihood for the businessman. Everyone has to satisfy his needs and hence no one is expected to undertake business activities without any earning for the same. 

(b) Rewards for taking risks: Risk is always associated with the business.A person who invest money in the business has to bear the risk also. It is the profit element that motivates him to carry on with business even in the case of losses.

(c) Funds for Growth: Profit is the source of finance for expansion and diversification of business activities.

(d) Symbolic of efficiency and efficacy: Profits symbolize that management is efficient and business is operating in a healthy manner.

(e) Enhancement in goodwill: Profit help in building the reputation or goodwill of the business firms. With profit increasing over time, a business enterprise gains reputation. 

8. What is business risk? What is its nature?

Ans. The term 'business risk' refers to possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes and preferences of consumers, strike, increased competition, change in Government policy etc. These are of two types-speculative and pure.

Nature of Business Risks

1. Business risks arise due to uncertainties: Natural calamities, change in demand and prices, change in technology etc. are some of the examples of uncertainty which create risks.

2. Risk is an essential part of every business: No business can avoid risk. Risk can be minimised but cannot be eliminated.

3. Degree of risk depends mainly upon the nature and size of business: For small scale business it is less and for large scale business it is more.

4. Profit is the reward for risk taking: An entrepreneur assumes risks and in consideration he gets reward which is called profit. Greater the risk higher is the chance of profit.