NCERT Solutions for Class 11 Business Studies Chapter 1 - Business, Trade and Commerce

Short Answer Questions:

1. Why is business considered as economic activity?

Ans. A Business is an economic activity because it is undertaken with an objective to earn money or livelihood. It does not involve love, affection, sentiments etc. In involves the production and sale of goods and services undertaken with a motive of earning a profit by satisfying human needs in society.

2. How does business contribute to the economic development of a country?

Ans. The business helps to stabilize, stimulates and contributes to the growth of economics in the following ways:

(a) Investing in people's demand
(b) Bringing employment opportunities to economy
(c) Increase technology development
(d) Solution to new challenges
(e) Active competition

3. State the different types of economic activities.

Ans. Business: It is an economic activity which involves purchase or production and sale of goods and services with a motive to earn profits by satisfying human needs in society.
Profession: It is an economic activity which requires application of specialised Knowledge and skills in the occupation. It needs to follow guidelines or code of conduct laid by respective professional bodies.
Employment: It is an economic activity which requires people to work for others and remuneration or salaries/wages in return.

4. State the meaning of business.

Ans. Business refers to an economic activity of producing or procuring goods for the purpose of resale with a sole aim to earn profits. It involves regular supply of such goods and services which satisfies human needs. It can be both profit or non-profit organisation that function to gain profits or achieve a social cause respectively.

5. How would you classify business activities?

Ans. Business activities are classified into two broad categories Industry and Commerce. Industry is related to producing or processing goods and raw materials it may be divided into three categories namely primary, secondary and tertiary. Whereas Commerce, is related to providing all such service which facilitate exchange of goods and services between producers, traders and consumers.

6. What are the various types of industries?

Ans. There are three main types of industries:

Primary Industries: All such industries which are related to extraction and production of natural resources or reproduction and development of living organism. These types of industries can be extractive or genetic.
Secondary Industries: All such industries which use raw material extracted by primary industries to produce goods for consumers or for further use by industrial units. These industries include manufacturing and construction industries.
Tertiary Industries: All such industries which provide support services to primary and secondary industries in the form of transporting, warehousing, financing etc.

7. Explain any two business activities, which are auxiliaries to trade.

Ans. Transportation: It provides facility to transfer raw material from place of extraction to producer or movement of finished goods from factories to place of consumption using road, rail or air means of transportation.
Warehousing: Goods are not sold or consumed immediately after production. They are hold in stock to be available as and when demand comes. Special arrangement must be made for storage of goods to prevent loss or damage. Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed.

8. What is the role of profit in Business?

Ans. Profit provides a source of income to the owner, it provides funds and motivation for growth and expansion, it acts as a yardstick of business performance, it helps in building business reputation.

9. What is meant by business risk?

Ans. Business risk is the possibility of earning inadequate profits or losses due to uncertainties or unexpected changes in the market conditions. Business risk is a result of uncertain events, risk involved because of size of business, nature of business and it is a reward for the owner for bearing risk.

10. State the causes of risks involved in business.

Ans. Business risks arise due to a variety of causes, which are classified as follows:
(a) Natural Causes
(b) Human Causes
(c) Economic Causes
(d) Other Causes

Long Answer Questions:

1. Discuss the development of indigenous banking system in Indian subcontinent.

Ans. In the beginning of civilisation, human needs was simple and limited. The primitive world's trade was carried out according to the barter exchange, in which people used to exchange goods with each other to satisfy their wants. For e.g., when a farmer gives wheat and gets cloth from the weaver in return, it is known as barter exchange.

As economic life progressed, metals began to supplement other commodities as money because of its durability and divisibility. As money served as a medium of exchange, the introduction of metallic money and its use accelerated economic activities. Indigenous Banking System played a prominent role in lending money and financing domestic and foreign trade with currency and letter of credit.
With the development of banking, people began to deposit precious metals with lending individuals (functioning as bankers or Seths) and money became an instrument for supplying the manufacturers with a means of producing more goods.

Documents such as 'Hundi' and 'Chitti' were in use for carrying out transactions in which money passed from hand to hand. Hundi as an instrument of exchange was prominent in the subcontinent. Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. So, Hundis involved a contract which: (a) warrant the payment of money, the promise or order which is unconditional; (b) capable of change through transfer by valid negotiation.

2. Define business. Describe its important characteristics.

Ans. Business is an economic activity with involves purchase or production and sale of goods and services with a motive to earn profits by satisfying human needs in society. It can be both profit or non-profit organisation.
The characteristics of a business are:

Business an Economic Activity: Business is considered as an economic activity because It is undertaken to earn money for livelihood and not for any sentimental reasons. It satisfies human needs by supplying goods and services for mutual profit. Business can be performed at a small or at a large scale, at individual or organised level.
Production or Procurement of Goods and Services: Business supplies goods to meet the human needs by either manufacturing or producing goods. Procuring or purchasing the consumer or capital goods. Providing services in the form of banking, transportation, electricity etc..
Sale or Exchange of Goods and Services: Business involve transfer or exchange of goods and services between seller and buyer for a value. Goods produced or purchased for personal consumption cannot be a business activity.
Dealing in Goods and Services on Regular Basis: For an economic activity to be a business, it is a must that it should be undertaken on regular basis. One single transaction does not constitute business, for e.g., A car dealer buys and sells cars on regular basis. An old car sold for cash or exchanged for purchase of a new car is not a business activity.
Profit Motive: Profit earning is one of the main objectives of a business activity. Business earns profit not only cover its cost but also for survival and future growth. Profit is the yardstick to measure the success of a business. Therefore, businessmen make all possible efforts to maximise profits, by increasing the volume of sales or reducing costs.

3. Compare Business with Profession and Employment.

Basis	Business	Profession	Employment
Mode of Establishment	Start of business depends on the decision of the owner and has to follow legal formalities if any to establish business.	One can practice a profession after getting membership and certificate of practice from the respective professional body.	Any person can start his/her employment after receiving letter of appointment and signing of employment contract.
Main objective	To earn maximum profit.	To provide professional services.	To earn regular income and satisfy the employer.
Reward/Return	Profits are owner’s reward.	Professional fee.	Salary/Wages as fixed at the time of employment.
Transfer of Interest	Interest can be transferred for a consideration or otherwise after following legal formalities.	Not Possible.	Not Possible.
Risk	Risk is involved due to uncertainty of profits.	A professional usually receives predefined or agreed fee, thus moderate risk.	Salaries are fixed. They do not depend on company’s performance, therefore no risk at all.

4. Define Industry. Explain various types of Industries giving examples.

Ans. Industry refers to economic activities, which are connected with conversion of resources into useful goods.It includes all those processes by which goods are produced by the application of human or mechanical power. The term industry is also used to mean group of firms producing similar or related goods. For e.g., cotton textile industry refers to all manufacturing units producing textile goods from cotton. Similarly, electronic industry would include all firms producing electronic goods.
Industrial activities lead to production of variety of goods for various purposes. These are divided into three broad categories:

Primary industry: Includes all those activities, which are connected with extraction and production of natural resources reproduction and development of living organisms, plants, etc. These industries can be further classified into two categories: (i) Extractive Industries (ii) Genetic Industries
Secondary industry: Includes all those activities, which are connected with using the raw materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, sugarcane is produced in primary industry, but sugar is produced (by using sugarcane as raw material) in the secondary industry. Secondary Industry can be further classified into two categories: (i) Manufacturing industries (ii) Construction industries.
Tertiary industry : Includes all those activities, which are concerned with providing support services to primary and secondary industries as well as activities relating to trade. It is also known as Service Industry. Tertiary Industry tries to remove various hindrances or obstacles which arise during production and distribution of goods and services.

It provides the following service facilities:

Transport: It facilitates movement of goods from one place to another.
Banking: It provides finance and credit for various business activities.
Insurance: It provides protection from various kinds of risks.
Warehousing: It stores goods to facilitate their supply to the market at the right time.

5. Describe the activities relating to commerce.

Ans. Commerce includes two types of activities:
Trade and Auxiliaries to Trade

Trade: Trade refers to buying and selling of goods and services with the aim of earning profits. It is an essential part of commerce. It helps in making the goods produced available to ultimate consumers or users.
- In the absence of trade, both producers and consumers will have to search for each other and it would not be possible to undertake production activities on a large scale.
- Trade can be carried out on small scale (like in case of Hawkers or Small Shops) or large scale (like in case of Big Departmental Stores).
- Trade removes this hindrance of person' by creating a link between producers and consumers. The persons who are engaged in trade are known as Traders or Middlemen.
Auxiliaries to trade: It refers to those activities which facilitate the purchase and sale of goods, i.e., which are meant for assisting trade.
- These activities are generally referred as services because these are in the nature of facilitating the activities relating to industry and trade.
- Transport, banking, insurance, warehousing and advertising are regarded as auxiliaries to trade because they play a supportive role. These activities not only support trade, but also the industry. Hence, auxiliaries are an integral part of entire business activities.
- Auxiliaries to trade helps in removing various hindrances which arise in production and distribution of goods.

6. Explain any five objectives of business.

Ans. The objectives of business enterprise must be set as follows:

Market Standing: Market standing refers to the position of an enterprise in relation to its competitors. For e.g., position of 'Airtel' in relation to Vodafone-idea. A business enterprise must aim to increase its market standing by offering good quality products at reasonable prices and serving them better than competitors.
Innovation: It is central to the growth of any business enterprise. It helps business to scale up and give competitive edge to the enterprise in the market. In this competitive world, innovations are very important for a business enterprise to flourish.
Productivity: Productivity is calculated by comparing the value of outputs with the value of inputs. It is used as a measure of efficiency. Every business enterprise must aim to achieve greater productivity through best possible use of available resources.
Physical and Financial Resources: All business enterprises require physical resources (like plant, machinery, etc.) and financial resources (i.e., funds) in order to produce and supply goods and services to its customers. Every business enterprise must aim to acquire these resources according to its requirements and must use them efficiently
Earning Profits: Earning profits on the capital employed is the main objective of every business enterprise. Every business aims to earn a reasonable profit in order to survive and grow in this competing world.

7. Explain the concept of business risk and its causes.

Ans. The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events.

There always exists the possibility of danger of incurring a loss in the process of carrying on the business activities.
For e.g., demand for a particular product may decline due to change in fashion, tastes or preferences of consumers or due to increased competition from other producers.
A businessman tries to control or minimise the risk, but they cannot altogether be aided.

Causes of Business Risk
Business risk arises due to the following causes:

Natural Causes: Natural causes are beyond the control of human beings. Natural calamities like flood, earthquake, lightning, heavy rains, famine, etc. can lead to huge losses. They result in heavy loss of life, property and income in business. Human beings cannot make any preparation against natural causes as they are uncertain factors.
Human Causes: They include chance of loss due to human resources of the organisation. There may be carelessness, misunderstanding, dishonesty, ill intentions on the part of human beings or stoppage of work due to strikes, riots, management inefficiency, etc.
Economic Causes: They include chance of loss due to change in market conditions. These causes relate to risk of change in demand and supply, change in degree of market competition, price fluctuations, change of technology or method of production, change in fashion, taste or preferences of customers, etc. It also includes financial problems like high interest rate for borrowing, levy of higher taxes, etc.
Other Causes: There are also a number of other factors which causes business risk. A business may suffer losses due to changes in government policies, fluctuations in exchange rates or mechanical failures such as the bursting of boiler.

8. What factors are to be considered while starting a business? Explain.

Ans.

Choice of Business: The entrepreneur must decide on the nature and type of business to undertake. Factors such as growth potential, technical knowledge, and personal interest in the product or service should be considered.
Scale of operation: The size of the firm should be determined based on factors like anticipated demand, available skills, and capital. Starting at a large scale may be suitable if there is confidence in high demand, while smaller or medium-scale operations may be preferred in uncertain market conditions.
Form of Ownership: The entrepreneur must choose the appropriate form of ownership, such as sole proprietorship, partnership, or a joint-stock company. Factors like capital requirements, liability of owners, profit-sharing and transferability of interest should be considered.
Location: Selecting the right location for the business is crucial. Factors like availability of raw materials, labour, infrastructure, and supportive services such as banking, transportation, and communication should be taken into account.
Financing: Adequate capital must be arranged for starting and sustaining the business. Financial planning should determine the required funds and their sources, considering investment in fixed and current assets.
Physical Facilities: Availability of necessary physical facilities, including machinery, equipment, buildings, and supportive services, must be ensure. The decision depends on the nature, size and financial capability and acquired physical resources.
Plant Layout: A layout plan showing the arrangement of physical facilities should be designed, considering the scale of operation and acquired physical resources.
Competent Employees: Hiring and retaining competent and committed employees is crucial for the success of a business. Human resources play a vital role in converting resources into desired outputs efficiently.
Tax planning: Entrepreneurs need to consider tax liabilities under various tax laws and engage in legal and ethical tax planning to minimise tax burdens.
Launching the Enterprise: Once decisions regarding the above factors are made, the entrepreneur can proceed with launching the business, which involves mobilising resources, fulfilling legal formalities, starting production, and initiating sales promotion activities.