Plus One Business Studies Notes Chapter 1 Nature and Purpose of Business

Kerala Plus One Business Studies Notes Chapter 1 Nature and Purpose of Business

Contents

• Economic and non-economic activities
• Business and its characteristics
• Business, Profession and Employment
• Classification of business activities
• Industry and commerce
• Objectives of business
• Business risk
• Factors to be considered before starting a business.

Activities which human beings undertake are known as human activities. We can divide these activities into two categories.

1. Economic activities
2. Non-economic activities

1. Economic Activities:
The human activities that are undertaken with an objective to earn money or livelihood is known as economic activities. eg: A worker working in a factory, a doctor operating in his hospital, a manager working in the office, a teacher teaching in a school etc.

2. Non-economic activities:
Activities are undertaken to derive psychological satisfaction are known as non economic activities. eg: Mother preparing food for her children, Praying, listening to radio or watching television, playing football with friends, etc.

Types of economic activities:

• Business
• Employment
• Profession

Business:
Business may be defined as an economic activity involving the production or purchase and sale of goods and services with the main object of earning profit by satisfying human needs in the society.
Characteristics of business

1. Business is an economic activity with the object of earning profit.
2. Business includes all the activities concerned with the production or procurement of goods and services.
3. There should be sale or exchange of goods and services for the satisfaction of human needs.
4. Business involves dealings in goods or services on a regular basis. Normally, one single transaction of sale or purchase is not treated as business.
5. One of the main objectives of business is to earn maximum profit.
6. Business involves risk and uncertainty of income. Risk means the possibility of loss due to change in consumer taste and fashion, strike, lockout competition, fire, theft etc.

Employment:
Employment refers to that type of economic activity in which people engage in some work for others regularly and get salary or wages in return of their services.
Characteristics of Employment

1. There must exist employer-employee relationship.
2. There must be a service contract between the employer and employee.
3. Employees get salary or wages for their services
4. Regularity in service.

Profession:
Profession refers to an occupation which requires specialized knowledge, skip and training. Its objective is to provide service to the society.
Characteristics of Profession

1. A profession requires specialized knowledge, training and skill
2. The membership of a professional body is a must
3. Professionals have a code of conduct
4. They charge fee in return of their service.

Comparison of Business, Profession and Employment:

Classification of Business Activities: Business activities may be classified into two categories

• Industry
• Commerce.

Chart showing business activities

Industry:
Industry refers to economic activities, which are connected with conversion of resources into useful goods. Industries may be divided into 3 categories.
They are
1. Primary industries:
Primary industries are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc. Such industries are further divided into two.
(i) Extractive industries:
These industries extract products from natural resources. eg: mining, farrqing, hunting, fishing etc.

(ii) Genetic industries:
These industries are engaged in activities like rearing and breeding of animals, birds and plants. eg: diary faming, paultry farming, floriculture, pisciculture etc.

2. Secondary industries:
Secondary industries deal with materials extracted at the primary stage. Such goods may be used for consumption or for further production. Secondary industries are classified into two.
They are:
(i) Manufacturing industries:
Manufacturing industries engage in converting raw materials into finished goods. eg: Conversion of rubber into cotton, timber into furniture rubber into tyres etc. Manufacturing industries may be further divided into four categories. They are,

• Analytical industry which analyses and separates different elements from the same materials. eg: Oil refinery
• Synthetical industry which combines various ingredients into a new product. eg: cement
• Processing industry which involves successive stages for manufacturing finished products. eg: Sugar and paper industry.
• Assembling industry which assembles different component parts to make a new product. eg: television, car, computer, etc.

(ii) Construction industries:
These industries are involved in the construction of buildings, dams, bridges, roads etc.

3. Tertiary industries:
These are concerned with providing support services to primary and secondary industries. eg: Transport, banking, insurance, warehousing, communication, advertising etc.

Commerce:
Commerce is defined as all activities involving the removal of hindrances in the process of exchange of goods. It includes all those activities, which are necessary for the free flow of goods and services from the producer to the consumer. Commerce includes trade and auxiliaries to trade.
Commerce = Trade + auxiliaries to trade
Functions of commerce:

Trade:
Trade refers to sale, transfer or exchange of goods. Trade may be classified into two broad categories
They are:

1. Internal trade
2. External trade

1. Internal, domestic ot dome trade:
is concerned with the buying and selling of goods and services within the geographical boundaries of a country. This may further be divided into two. They are:-
(a) Wholesale trade:
Under wholesale trade, the trader purchases goods in large quantities from the producers, and sells them in smaller quantities to the retailers.

(b) Retail trade:
Under the retail trade, the trader buys in comparatively smaller quantities from the wholesalers or producers and sells them to ultimate consumers.

2. External or Foreign trade:
Foreign trade consists of exchange of goods and services between two or more countries. Foreign trade may be divided in to three.

• Import trade: If goods are purchased from a foreign country, it is called import trade.
• Export trade: When goods are sold to a foreign country, it is known as export trade.
• Entrepot trade: When goods are imported for export to other countries, it is known as entrepot trade.

Auxiliaries to Trade (Aids to trade):
Activities which assist trade are called aids to trade or auxiliaries to trade.

1. Transport & Communication:
Transport facilitates the movement of raw material to the place of production and the finished products from factories to the place of consumption. Communication helps the producers, traders and consumers to exchange information with one another.

2. Banking & Finance:
Banking helps business activities to overcome the problem of finance. Commercial banks lend money in the form of overdraft, cash credit, loans and advances etc… and they also provide many services required for the business activity.

3. Insurance:
The goods may be destroyed while in production process or in transit due to accidents, or in storage due to fire or theft, etc. Insurance provides protection in all such cases.

4. Warehousing:
The goods should be stored carefully from the time they are produced till the time they are sold. This function is performed by warehouses.

5. Advertising:
Advertising helps in providing information about available goods and services and create in them a strong desire to buy the product.

Multiple Objectives of Business:
The main objectives of a business are:
1. Market standing:
A business firm can succeed only when it has a good market standing. Market standing refers to the position of an enterprise in relation to its competitors.

2. Innovation:
Innovation means developing new product or services orfinding new ideas and new methods of production and distribution. Innovation accelerates the growth of an enterprise.

3. Productivity:
Productivity is ascertained by comparing the value of output with the value of input. Every enterprise must aim at greater productivity through the best use of available resources.

4. Physical and financial resources:
The business must aim at maximum utilization of available physical and financial resources, i.e. men, material, money and machine in the best possible manner.

5. Earning Profit:
Earning maximum profit is the primary objective of every business. Profit is required for survival and growth of a business.

6. Manager performance and development:
Efficient managers are needed to conduct and co-ordinate business activities. So it is the objective of an enterprise to implement various programs for motivating the managers.

7. Worker performance and attitude:
Every enterprise must aim at improving its workers performance by providing fair salary, incentives, good working conditions, medical and housing facilities.

8. Social responsibility:
It refers to the obligation of business firm to contribute resources for solving social problems and work in a socially desirable manner.

Business Risks:
The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Business enterprises may face two types of risk, i.e. speculative risk and pure risk.

Speculative risks involve both the possibility of gain as well as the possibility of loss. It arise due to change in demand, change in price etc. Pure risks involve only the possibility of loss or no loss. The chance of fire, theft or strike is examples of pure risks.
Nature of Business Risks:

1. Business risks arise due to uncertainties.
2. Risk can be minimized, but cannot be eliminated. It is an essential part of business.
3. Degree of risk depends mainly upon the nature and size of business.
4. Profit is the reward for risk taking.

Causes of Business Risks: Business risks arise due to a variety of causes.
They are:

1. Natural Causes: it includes natural calamities like flood, earthquakes, lightning, heavy rains, famine, etc.
2. Human Causes: Human causes include dishonesty, carelessness or negligence of employees, strikes, riots, management inefficiency, etc.
3. Economic causes: These include change in demand, change in price, competition, technological changes etc.
4. Political Causes: Change in Govt, policies, taxation, licensing policy etc.

Starting a Business – Basic Factors:
Factors to be considered for starting a business:
1. Selection of line of business:
The first thing to be decided by any entrepreneur of a new business is the nature and type of business to be undertaken.

2. Size of the firm:
If the market conditions are favorable, the entrepreneur can start the business at a large scale. If the market conditions are uncertain and risks are high, a small size business would be better choice.

3. Choice of form of ownership:
The selection of a suitable form of business enterprise i.e. Sole proprietorship, Partnership or a Joint stock company is an important management decision. It depends on factors like nature of business, capital requirements, liability of owners, legal formalities, continuity of business etc.

4. Location of business enterprise:
Availability of raw materials and labour, power supply and services like banking, transportation, communication, warehousing, etc., are important factors while making a choice of location.

5. Financing:
Proper financial planning must be done to determine (a) the requirement of capital, (b) source from which capital will be raised and (c) the best ways of utilizing the capital in the firm.

6. Physical facilities:
Availability of physical facilities including machines and equipment, building and supportive services is a very important factor to be considered at the start of the business.

7. Plant layout:
Layout means the physical arrangement of machines and equipment needed to manufacture a product.

8. Competent worked force:
Every enterprise needs competent and committed employees to perform various activities so that physical and financial resources are converted into desired outputs.

9. Tax planning:
The promoter must consider in advance the tax liability under various tax laws and its impact on business decision.

Plus One Business Studies Notes