Nature and Purpose of Business – Study Notes CBSE Class 11 Business Studies Chapter 1

What are Economic And Non-Economic Activities?

  • Economic activities are activities that generate income or value. They involve the production, distribution and consumption of goods and services.
  • Non-economic activities are activities that do not generate any income or value. They are performed out of personal interest or necessity.
  • Economic activities involve commercial transactions and contribute to a country’s GDP. Examples include working in a company, selling goods, farming, etc.
  • Non-economic activities do not involve commercial transactions. Examples include household work, leisure activities, volunteering, etc.
  • Rhea is a software engineer working in a tech company. Her job involves developing computer applications, for which she earns a monthly salary. This is an economic activity.
  • Rhea also enjoys gardening in her free time. She grows vegetables for her family’s consumption. This is a non-economic activity since it does not generate any income for her.

What are Economic Activities?

Economic activities refer to activities that people undertake with the goal of earning a livelihood. Economic activities can be classified into three main categories – business, profession and employment.

Business

  • Business involves the production, purchase and sale of goods or provision of services with the aim of earning profit and fulfilling consumer needs. It requires an entrepreneurial spirit and capital investment. The income earned is called profit.
  • In short, business refers to commercial activities done to earn profit by providing goods and services to consumers.
  • An example is a person starting a restaurant business by renting a space, hiring staff, and purchasing raw materials and equipment. He/she sells food to customers at a price higher than the costs, earning a profit.

Profession

  • Profession refers to an occupation that requires specialised skills, expertise, education and training. For example – doctors, lawyers, chartered accountants, teachers.
  • Professionals have to follow codes of conduct and guidelines set by professional associations. They charge professional fees for their services.
  • A lawyer is a professional who has studied law, cleared exams and is certified to practice law. He provides legal services to clients and charges professional fees.

Employment

  • Employment refers to jobs where people work for an employer and get paid in the form of salary or wages. For example – managers, clerks, drivers, cooks, factory workers.
  • The employer and employee sign an employment agreement that specifies the job role, salary, working hours and other terms and conditions.
  • A bank clerk is in employment. He is hired by the bank through a recruitment process. He works in the bank as per the job agreement and gets a monthly salary.

Non-economic Activities

Non-economic activities refer to actions that are undertaken to fulfill social and psychological needs, rather than for monetary gain. These activities are motivated by intangible factors like love, sympathy, patriotism, and sentimentality.

Non-economic activities can be defined as activities that are performed to satisfy the social and emotional needs of people, unrelated to financial or economic incentives. They are driven by psychological motivations like patriotism, love, sympathy, relationships, etc. rather than the motivation for profit or livelihood.

 

Explanation

  • Non-economic activities are not aimed at earning money or livelihood.
  • They are performed for emotional, social or psychological reasons.
  • Examples include volunteering, cooking for family, donating to charity, fighting for one’s country, social interactions, hobbies, etc.
  • The main motivations are intangible – love, care, sympathy, patriotism, relationships, leisure, etc.
  • They contribute to overall wellbeing even though no economic value is generated.

Case Study Or Example: Cooking a meal for one’s family is a non-economic activity. The person doing it may not get paid for it directly. However, they do it out of love, care and emotional bonding with the family. There is no commercial transaction involved. The satisfaction generated is psychological and emotional, not monetary. This illustrates how non-economic activities are important for social and psychological well-being.

The concept of Business

Business refers to an economic activity involving the production and sale of goods and services undertaken with the motive of earning profit by satisfying human needs in society.

Business means being busy in activities that earn money by providing goods and services to people.

Short Pointers For Revision:

  • Business involves producing or buying goods and selling them to make a profit.
  • Services like banking, insurance, transportation etc. are also businesses.
  • The main motive of business is to earn profits.
  • Businesses aim to satisfy human needs and wants by providing goods and services.

Case Study Or Example: A shopkeeper buying inventory and selling it at a higher price to customers is doing business to earn profits. The shopkeeper is satisfying the need for goods and making money in the process.

What are the Characteristics Of Business Activities?

Business is an economic activity undertaken with the objective of earning money through the production and sale of goods and services on a regular basis.

The main characteristics of business activities are:

  1. Economic Activity: Business involves the activity of producing or procuring goods and services to earn money. It is not done out of emotions like love or sympathy.
  2. Production/Procurement of Goods and Services: Business enterprises produce goods in a factory or procure them from other producers before selling them to consumers. Services like banking, transportation etc. are also provided.
  3. Sale/Exchange of Goods and Services: There is a sale or exchange of goods and services between the seller and buyer for some value or money. Business is not done just for own consumption.
  4. Regularity: Business involves regular dealings for sale and purchase. A single isolated transaction is not considered business.
  5. Profit Earning: The main aim of a business is to earn profits by increasing sales or reducing costs. Businesses cannot survive without profits.
  6. Uncertainty of Returns: The amount of profit to be earned in business is uncertain and cannot be predicted. There is always a possibility of losses.
  7. Risk Element: There are risks like changes in consumer preferences, accidents, competition etc. which create uncertainty of returns in business.

Case Study Or Example: A shopkeeper running a garment shop earns money by regularly buying clothes from wholesalers and selling them to customers. He undertakes various activities like advertising, inventory management, etc. to maximise profits but the profit amount is uncertain due to risks like changing fashions.

What are the Objectives Of Business?

The objectives of business refer to the predetermined goals that an organisation endeavours to achieve. These goals outline the intended future state that the organisation aims to realise. Business objectives are multifaceted and can be broadly categorised into economic and social objectives. 

Economic objectives focus on the financial and operational achievements of a business, including profit earning, market standing, innovation, resource management, productivity, manager’s development, and worker’s performance and attitude. 

Conversely, social objectives emphasise the business’s responsibilities towards society, including supplying quality products, avoiding unfair trade practices, ensuring employee welfare, generating employment, and protecting the environment.

Short Pointers For Revision:

  • Economic Objectives:
      1. Earning Profit: Essential for growth and survival.
      2. Market Standing: Aim to increase market share.
      3. Innovation: Implement new production methods and technologies.
      4. Resources: Acquire and efficiently use physical and financial resources.
      5. Productivity: Utilize resources for greater productivity.
      6. Manager’s Development: Improve managers’ performance through programs.
      7. Worker’s Performance and Attitude: Foster a positive work environment.
  • Social Objectives:
    1. Quality Products: Provide good quality at reasonable prices.
    2. Avoid Unfair Practices: Shun black marketing, adulteration, and misinformation.
    3. Employee Welfare: Ensure good working conditions and fair treatment.
    4. Employment Generation: Create job opportunities.
    5. Environmental Protection: Safeguard the environment and properly dispose of waste.

Case Study Or Example: Imagine a bakery called “Happy Buns” that wants to do well in business. The owner, Mrs. Baker, has certain goals to make her bakery successful and also be a good member of the community.

Economic Objectives:

  1. Earning Profit: Mrs. Baker aims to make more money than what she spends on making her tasty buns and cookies.
  2. Market Standing: She wants to become the most popular bakery in town, with lots of people coming in every day.
  3. Innovation: Mrs. Baker tries new recipes and buys modern ovens to make better treats.
  4. Resources: She buys only the best flour and chocolate and uses her money wisely to grow her business.
  5. Productivity: Mrs. Baker and her team work hard to bake lots of treats without wasting ingredients.
  6. Manager’s Development: She teaches her staff how to make the best buns and manage the shop well.
  7. Worker’s Performance And Attitude: Mrs. Baker creates a happy and friendly place for her team so they enjoy working and do a good job.

Social Objectives:

  1. Quality Products: Mrs. Baker ensures her treats are delicious and safe to eat, using only the finest ingredients.
  2. Avoid Unfair Practices: She never cheats on her customers or gives wrong information about her treats.
  3. Employee Welfare: Mrs. Baker makes sure her staff has a nice place to work, and she treats them fairly and pays them well.
  4. Employment Generation: By growing her bakery, she can hire more people from the town, giving them jobs.
  5. Environmental Protection: Mrs. Baker uses eco-friendly packaging and recycles to keep the town clean.

So, “Happy Buns” is not just about making money but also about being a responsible and liked business in the community.

What is the Role Of Profit In Business?

Profit in business can be understood as the financial gain that is realized when the amount earned from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity. It serves as a primary indicator of the business’s efficacy and success. 

The role of profit in business is multifaceted: it functions as a source of income for the entrepreneur, a measure of efficiency and performance, a means for reinvestment and growth, a facilitator for meeting liabilities and enhancing creditworthiness, and an indication of societal approval and utility of the business’s products or services.

Short Pointers For Revision:

  1. Income Source: Profit provides income for the business owner.
  2. Efficiency Indicator: Reflects the efficient management and success of the business.
  3. Reinvestment: Can be used for the expansion and growth of the business.
  4. Liability Management: Helps in the timely honouring of liabilities, enhancing creditworthiness.
  5. Societal Approval: Profits imply society values the business’s offerings.

Case Study Or Example: Let’s think about a lemonade stand run by a young girl named Devi. Devi sets up her stand in the summer and sells lemonade to people passing by.

  1. Income Source: When Devi sells her lemonade for more than it costs her to make, she makes a profit. This profit is like her income, which she can use to buy more things for herself.
  2. Efficiency Indicator: If Devi sells a lot of lemonade and makes a lot of profit, it shows that she’s doing a good job running her stand. She’s making her lemonade well and people like it.
  3. Reinvestment: Devi can use some of the money she makes to buy more lemons and sugar, or even get a bigger stand. This way, she can sell even more lemonade and grow her little business.
  4. Liability Management: If Devi borrowed money from her parents to start her stand, making a profit helps her pay them back on time. This shows her parents that she’s responsible and they might lend her money again in the future.
  5. Societal Approval: When people buy Devi’s lemonade and she makes a profit, it means people like what she’s selling. It shows that her lemonade is something people enjoy and want.

So, the profit for Devi’s lemonade stand is more than just extra money; it’s a sign that she’s doing a great job, and it helps her grow her business and earn trust.

What is Business Risk?

Business risk refers to the potential danger of incurring losses due to unforeseen, unpredictable, and unfavourable events in the future. It can be broadly categorised into two types: 

  1. Speculative Risk: This type of risk involves both the possibility of gain as well as loss. It primarily arises due to changes in market conditions, including fluctuations in demand and supply. 
  2. Pure Risk: This category of risk involves only the possibility of loss or no loss. Examples of pure risk include events like fire, theft, or strikes.

Short Pointers For Revision:

  • Risk of loss from unexpected events.
  • Two main types: Speculative Risk (gain or loss) and Pure Risk (loss or no loss).
  • Speculative risks are linked to market changes.
  • Pure risks include events like fire and theft.

Case Study Or Example: Imagine a toy manufacturing company, “ToyJoy.”

Speculative Risk Example: ToyJoy introduces a new toy in the market. This is a speculative risk because if the toy becomes popular, the company stands to gain a lot. However, if the toy is not well-received, it could face significant losses due to unsold inventory and wasted production costs.

Pure Risk Example: ToyJoy’s warehouse catches fire, resulting in the loss of a large stock of toys. This is a pure risk because there is no possibility of gain, only loss.

These examples should help illustrate the concept of business risk in a way that’s easy to understand for everyone.

Nature/Features Of Business Risks

What are the nature or features of business risks? These are the main things that define and affect the risks that businesses face.

These features include: 

  1. Natural disasters, changes in government policy, technological advancements, and other factors can all cause uncertainty. These uncertain future events are what put businesses at risk. 
  2. There is always a chance of risk in business, so it is an important part of all operations. 
  3. How a business’s size and type affect the level of risk it faces; different types and sizes of businesses face different levels of risk. 
  4. Because bigger risks usually mean bigger profits, entrepreneurs take them because they think they will help them make more money.

Short Pointers For Revision:

  • Business risks stem from uncertainties (e.g., natural disasters, policy changes).
  • Risk is unavoidable in business.
  • The amount of risk depends on the business’s size and nature.
  • Higher risk can mean higher potential profit.

Case Study Or Example: Let’s take the example of “Sunshine Solar,” a company that manufactures solar panels.

  1. Risk from Uncertainties: A sudden change in government policy that reduces subsidies for solar energy could pose a significant risk for Sunshine Solar, impacting its sales and profits.
  2. Inevitability of Risk: Sunshine Solar faces risks like changes in raw material prices or technological advancements by competitors, which are unavoidable aspects of doing business.
  3. Influence of Size and Nature: As a medium-sized company, Sunshine Solar might face more risks compared to a large corporation with more resources, but less risk than a small startup due to their established market presence.
  4. Relationship Between Risk and Profit: Sunshine Solar decides to invest in a new, innovative solar technology. This move is risky because the technology is unproven, but if it succeeds, the company could reap substantial profits and gain a competitive edge.

This example illustrates the various nature and features of business risks in a simple, relatable context.

Causes of Business Risks

Business risks refer to the potential for a commercial organization to experience losses or reduced profits due to uncertainties arising from various sources. 

These uncertainties can stem from a range of factors, including natural events, human actions, economic conditions, and other unforeseen circumstances. 

The causes of business risks are multifaceted and can significantly impact the operations, financial standing, and sustainability of a business.

Short Pointers For Revision:

  1. Natural Causes: Risks arising from uncontrollable natural events like floods, droughts, famines, and hailstorms causing loss of life, property, and income.
  2. Human Causes: Losses attributed to human factors such as employee negligence, carelessness, and errors.
  3. Economic Causes: Risks linked to market volatility, and changes in consumer tastes and preferences, affecting the business’s revenue.
  4. Other Causes: Miscellaneous risks including physical and technical disabilities, political unrest, and mechanical failures.

Case Study Or Example: Imagine a bakery, “Bread & Butter,” located in a small town.

  1. Natural Causes: One year, a severe flood hits the town. “Bread & Butter” suffers because the bakery is underwater, equipment is damaged, and they cannot sell bread, leading to a financial loss.
  2. Human Causes: One day, an employee forgets to turn off the oven overnight. This results in a small fire that damages part of the bakery and some equipment. The bakery has to close for repairs, leading to a loss of sales.
  3. Economic Causes: Suddenly, a new diet trend becomes popular, and people start avoiding carbs. The demand for bread drops, and “Bread & Butter” sees a significant decrease in customers, affecting their earnings.
  4. Other Causes: One day, a sudden political protest erupts in the town. The bakery is in the middle of the protest area and has to remain closed for several days. Also, their bread-making machine breaks down unexpectedly, causing further delays in production.

Each of these scenarios represents a different cause of business risk that “Bread & Butter” faces, demonstrating how various factors can impact a business’s profitability and continuity.

Methods of Dealing with Risks

Risk management methods refer to the various strategies and measures that businesses use to manage, mitigate, or transfer the potential negative consequences of uncertain events. 

These methods are critical in ensuring a business’s sustainability and success by lowering the likelihood of loss or effectively preparing the business to deal with adverse situations. 

The primary approaches include avoidance, prevention, retention, transfer, and sharing of risks.

Short Pointers For Revision:

  1. Avoidance: Choosing not to engage in activities that are too risky.
  2. Prevention: Implementing measures such as installing firefighting devices to minimize risks.
  3. Transfer: Using insurance policies to transfer the risk to an insurance company.
  4. Retention: Setting aside provisions from current earnings for potential losses, like bad debts.
  5. Sharing: Collaborating with other businesses to share the burden of risks, such as price fluctuations.

Case Study Or Example: Let’s take an example of a toy manufacturing company, “ToyWorld.”

  1. Avoidance: “ToyWorld” decides not to produce a new toy that has a high chance of being banned due to safety concerns.
  2. Prevention: They install smoke detectors and fire extinguishers in their factory to minimize the risk of damage from potential fires.
  3. Transfer: “ToyWorld” buys an insurance policy to cover damages and losses in case of unforeseen events like a factory fire or theft.
  4. Retention: The company sets aside a certain amount of money each year to cover the costs of toys returned by customers because they were faulty.
  5. Sharing: “ToyWorld” partners with a network of toy retailers. They agree that if the price of certain materials drops, they will all bear the cost equally, reducing the financial impact on any single company.

By applying these methods, “ToyWorld” effectively manages its risks and ensures it can continue to operate smoothly despite potential challenges.

Classification Of Business Activities

Business activities refers to all the processes involved in making goods and services and delivering them to end consumers. These activities can be broadly categorized into two sectors – industry and commerce.

Industry includes activities related to the production of goods like extracting raw materials, manufacturing, construction etc.

Commerce includes activities involved in distributing finished goods like transportation, warehousing, wholesale and retail trade, advertising, banking, insurance etc.

So in summary, business activities involve both the production of goods through various industries and the distribution of finished goods through commerce and trade. Classifying business activities into industry and commerce allows for systematic analysis of the overall structure and functioning of the business sector.

 

  • Industry
    • Primary
      • Extractive
      • Genetic
    • Secondary
      • Manufacturing
        • Analytical
        • Synthetic
        • Processing
        • Assembling
      • Construction
    • Tertiary
      • Transportation and Communication
  • Commerce
    • Trade
      • Internal
        • Wholesale
        • Retail
      • External
        • Import
        • Export
        • Entrepot
    • Auxiliaries to Trade
      • Warehousing
      • Insurance
      • Transportation and Communication
      • Banking and Finance
      • Advertising

Industry

Industry refers to the segment of the economy that is concerned with the production of goods and services. It involves the conversion and transformation of various raw materials into finished products using different processes and technology.

 

Short Pointers For Revision:

  1. Concerned with the production of goods and services
  2. Converts raw materials into finished products
  3. Uses technology and processes for production
  4. Examples include manufacturing, mining, construction etc.

 

Case Study Or Example: A cotton textile industry that converts raw cotton into fabrics and garments is an example of the industrial sector. The raw cotton is transformed into yarn, the yarn is used to create fabrics which are then stitched into clothes. This step-by-step conversion of raw material into finished goods for consumption is the key function of industries.

Classification of Industries

 The classification of industries refers to the categorization of economic activities into distinct groups based on their primary functions and the types of goods or services they produce. This classification system divides industries into three main categories: primary, which deals with the extraction of natural resources; secondary, which transforms these resources into finished products; and tertiary, which provides services and support to the primary and secondary industries.

Short Pointers For Revision:

  1. Primary Industries
    • Concerned with the extraction and provision of natural resources.
    • Subcategories:
      • Extractive Industry: Mining, fishing, forestry.
      • Genetic Industry: Agriculture, breeding of animals, plant cultivation.
  2. Secondary Industries
    • Focus on converting raw materials into finished goods.
    • Subcategories:
      • Manufacturing Industry: Further classified into analytical, synthetic, processing, and assembling industries.
      • Construction Industry: Building infrastructure like roads, bridges, and buildings.
  3. Tertiary Industries
    • Provide services to support primary and secondary industries.
    • Includes sectors like insurance, warehousing, banking, transportation and communication, and advertising.

Case Study Or Example: Let’s take the journey of a wooden dining table as an example to understand the classification of industries:

  • It starts with a primary industry: a lumberjack cutting down trees (extractive) and the forestry service managing the growth of new trees (genetic).
  • Next, the wood is sent to a secondary industry: a manufacturing plant. Here, it might go through:
    • An analytical process to separate the wood into different qualities.
    • A synthetic process if the wood is mixed with other materials.
    • A processing stage where the wood is treated and shaped.
    • Finally, an assembling process where parts of the wood are put together to create a dining table.
  • After the table is made, it’s the tertiary industries’ turn:
    • The transportation service delivers the table to a furniture store.
    • The warehouse stores the table until it’s sold.
    • The bank processes the payment when someone buys the table.
    • If the store advertises the table on TV, that’s the advertising industry in action.

So, from tree to dining room, the table has been through all three classifications of industries.

Commerce

Commerce refers to the set of activities involved in transferring finished goods from the producers to the end consumers. It forms the crucial link between the production of goods and their consumption by enabling distribution.

Short Pointers For Revision:

  1. Links producers with consumers
  2. Distributes goods from manufacturer to consumer
  3. Includes trade like wholesale, and retail
  4. Also includes auxiliaries like transport, banking, and insurance

Case Study Or Example: A farmer growing cotton operates in the primary sector. A textile mill that converts cotton into fabrics operates in the secondary sector. A wholesaler who purchases the fabrics from the textile mill and sells them to retailers operates in commerce trade. The retailers selling fabrics to consumers are also engaged in commerce. Auxiliaries like transportation and banking assist in the distribution. All these activities that bridge production with consumption form the commerce sector.

Trade

Trade refers to the activity of buying and selling goods and services for the purpose of earning profit. It serves as an intermediary link that facilitates the transfer of goods from producers to ultimate consumers.

Short Pointers For Revision:

  1. Involves buying and selling of goods
  2. Connects producers with consumers
  3. Internal trade – Within the country (wholesale, retail)
  4. External trade – Between countries (export, import, entrepôt)
  5. Wholesale – Buying and selling in large quantities
  6. Retail – Buying and selling in small quantities

Case Study Or Example: A farmer growing potatoes sells them to a wholesale trader in a mandi. The trader sells the potatoes to a retail shop owner. The shop owner sells them to consumers in small quantities. This demonstrates internal trade with wholesale followed by retail. If the trader exports potatoes to another country, it becomes external trade. The trader is facilitating trade and bridging the gap between the producer-farmer and end consumers.

Auxiliaries To Trade

Auxiliaries refer to activities and services that assist in the buying and selling of goods and services. They facilitate the distribution and sale of goods by providing support functions.

Short Pointers For Revision:

  1. Transportation – Movement of goods
  2. Warehousing – Storage of goods
  3. Banking – Providing finance
  4. Insurance – Risk coverage
  5. Advertising – Promotion of goods

Case Study Or Example: A farmer grows apples and wants to sell them to customers in the city. He stores the apples in a warehouse so they remain fresh until sold. He takes a loan from a bank to pay for the storage and transport. The apples are transported via trucks to shops in the city. 

The farmer ensures the apples in case they get damaged. Shops advertise the apples on TV, and in newspapers to inform consumers. All these auxiliaries help the farmer in trading his apples from production to final sale.

What is Role Of Commerce? 

Commerce consists of activities which help remove hindrances in the process of exchange for maintaining the free flow of goods and services.

  • Hindrance of
    • Person
    • Place
    • Time
    • Risk
    • Finance
    • Information
  • Removed By:
    • Trade
    • Transport
    • Insurance
    • Advertising
    • Storage and Warehousing
    • Banking and Financial Institutions

Commerce includes activities that remove hindrances in the exchange process to allow free flow of goods and services.

Short Pointers For Revision:

  • Removes hindrance of person – Trade connects buyers and sellers.
  • Removes hindrance of place – Transport moves goods across places.
  • Removes hindrance of time – Warehousing and storage preserve goods over time.
  • Removes hindrance of risk – Insurance protects against business risks.
  • Removes hindrance of finance – Banking and financial institutions provide financing.
  • Removes hindrance of information – Advertising gives information about goods and services.

Case Study Or Example: A farmer selling fruits to a fruit shop in the city removes hindrances of persons by connecting producers and traders through trade. Transporting fruits by truck removes the hindrance of place. Storing surplus fruits in cold storage removes the hindrance of time. Getting crop insurance removes the hindrance of risk. Taking a loan from the bank removes the hindrance of finance. Advertising fruits in the shop remove hindrance of information.

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