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Class 11 Business Studies Chapter 1 Important Extra Questions Nature and Purpose of Business

Nature and Purpose of Business Important Extra Questions Short Answer Type

Question 1.
Differentiate between Economic and Non-economic activities.
Distinction Between Economic And Non-Economic Activities:

Basis Economic Activities Non-Economic Activities
1. Meaning These activities are undertaken by people to earn income to meet their material needs. These activities are of social and religious nature and do not generate any economic gain.
2. Purpose/Motive These activities are undertaken with economic motives, for the generation of income and wealth to earn a living. These activities are undertaken by social or psychological motives. The basic purpose is to serve other segments of society.
3. Need Satisfaction These satisfy the economic needs of people engaged such as food, clothing, shelter, etc. These satisfy the social and psychological needs of people engaged.
4. Types of Examples People engaged in economic activities include traders. Manufacturer. Teacher. Doctor. Electrician. Worker, etc. People engaged in household activities, charitable work, social work, the welfare of the poor. etc. are said to be engaged in non¬economic activities.
5. Logic These activities are guided by rational considerations of cost and profits. Sentiments and emotions guide these activities.

Question 2.
Explain briefly the objectives of commerce.
Functions/Objectives/Purpose of Commerce: Following are the important objectives of commerce:
1. Earning profit: The prime motive of commercial activities is to earn a profit. It is the profit motive that encourages and motivates us to start a business and undertake commercial risks. No business can survive without making adequate profits to meet its cost of remunerating the factors of production involved in it.

2. Commitment to social values: The prime motive behind commercial activities is profit motive i.e. earning something. It does not mean that the business should indulge in anti-social activities because such activities are not only illegal but also bring a bad name to the business. It must honor social values and safeguard the interest of consumers, workers, and the community. The social objective helps to improve the reputation and public image of a business.

3. Fair return and safety of capital: It is the prime duty of commercial enterprises that they must pay a fair return on the capital invested by the proprietors of the business. The capital should not be lost in the process of commercial activities. Shareholders must receive dividends at competitive rates.

4. Responsibility towards workers – Workers being essential, active, and sensitive factors of production must be rewarded suitably. The business objective is to ensure the welfare of employees by providing good working conditions, fair wages, and facilities such as housing, medical, etc. Such welfare activities help to improve the physical and mental health of workers.

Question 3.
Explain the difference between Industry, Commerce, and Trade.
Difference between Industry, Commerce, and Trade:

Points of Difference Industry Commerce Trade
1. Meaning It relates to the production of goods and services. It relates to the distribution of goods and services. It relates to the actual purchase and sale of goods.
2. Capital It requires a huge amount ’ of fixed and working capital for production It requires limited fixed capital but huge working capital. It requires small capital as per turnover.
3. Scope It covers genetic, manufacturing, and constructive industries. It covers trade and auxiliaries to trade. Does it include? ‘Mental and external trade
4. Basis It is the basis of modern business. Its basis is industries and professions. it is based upon commerce.
5. Utility Goods are produced by transforming forms, creating form utility. Goods are produced by a change of place or by storing. Creating place utility. Goods are produced by transferring their possession, thus creating possession utility.
6. Place of work Industries are established at a particular place. It may be a work-shop or factory. Here, goods are transferred from one place to other places The market is the place where trading activities are performed.

Question 4.
Define profession and mention the basic feature of a profession.
Profession: A profession is a specialized occupation that involves the rendering of personal services by the use of professional knowledge. Examples of professionals are doctors, lawyers, accountants, engineers, etc. Each professional has a membership of the professional body (such as the Medical Council of India or Bar Council of India) which enforces the code of conduct among the members.

The basic features of a profession are as follows:

  1. A profession requires specialized knowledge and training about the concerned field. They must be evolved through scientific methods of observation experiment and experience.
  2. The membership of the professional body is compulsory in the case of a profession. For example, a chartered accountant must be a member of the Institute of Chartered Accountants of India. The body regulates and develops professional activities and enjoys legal powers as a statutory body.
  3. There is an established code of conduct enforced by the professional body. It contains norms of behavior for the members. Members who violate the code can be de-recognized and disqualified from the profession.
  4. A professional cannot advertise himself if it is prohibited by the professional body.
  5. Professionals charge fees for the services rendered to their clients.

Question 5.
Explain the term ‘Employment’ and give its distinctive features.
Employment or Service: A person is said to be employed or in service when he undertakes to render personal services under a contract of employment. In return for his services, the employee gets wage or salary, allowances, bonus, and other benefits. The employer may be government, a government undertaking, or a private firm. Even a professionally qualified person such as a lawyer can join as an employee with some organization and work in return for the specified salary and other benefits and perquisites.

The distinctive features of employment or service are as follows:

  1. There must be a relationship between employer and employee.
  2. It involves performing the duties assigned by the employer under a written or oral contract.
  3. It does not need any capital investment.
  4. The employee gets wages/salaries and related benefits as a reward for the services.
  5. An employee can’t transfer his job to another.
  6. An employee has to follow the rules and norms prescribed by the employer.
  7. There are no standard qualifications to get employment. It all depends upon the nature and requirements of the specific job.

Question 6.
Give a short note on Secondary Industries.
Secondary Industries: Secondary industries are concerned with the processing materials which have ready been produced at the primary stage. The output of the primary industry is used as the raw-material for secondary industries.

Secondary industries may be of two types:

  1. Manufacturing industries, and
  2. construction industries.

Manufacturing Industries: These industries are concerned with the processing or transformation of raw-material and semi-finished products into finished products. The products of extractive industries generally become the raw materials of manufacturing industries. Factory’ production is the outcome of the manufacturing industry. Manufacturing industries are of the following types.

(a) Analytical: In the analytical manufacturing industry, basic raw-materials are broken into several useful materials. Petroleum refining is an example of an analytical industry. The crude oil is extracted from beneath the earth and is processed and separated into petrol, kerosene, gasoline, lubricating oil, etc.

(b) Synthetic: Two or more materials are mixed together in the manufacturing operations to form some new products. Products like soap, Cement, paints, fertilizers, and cosmetics are produced by synthetic industries.

(c) Processing: In this industry, raw materials are processed through various stages to make the final products. Textiles, sugar, and steel are examples of this category.

(d) Assembly Line: In the assembly industry, the finished products can be produced only after various components have been made and then brought together for final assembly. Production of automobiles, watches, televisions, bicycles, railway wagons, etc. is some typical examples of this industry.

Construction Industries: These industries are concerned with the construction of buildings roads, dams, and bridges. These industries use the products of manufacturing industries such as iron and steel, cement, lime, mortar, etc., and also the products of extractive industries such as stone, marble, etc. The remarkable feature of these industries is that their products are not sold in the sense of being taken to the markets. They are constructed and fabricated at fixed sites.

Question 7.
In today’s competitive world, the service industry plays a major role. Explain the tertiary or service industry.
Tertiary or Service Industry’ – In this sector, various types of services may be classified into two broad categories commercial and personal. They serve as the backbone of the modern industrial system.

Territory activities include transport, banking, insurance, warehousing, and advertising which provide the infrastructure for industry and trade. In other words, these are service activities that support business enterprises. Since these are all commercial activities, firms engaged in banking, transportation, insurance, etc. are known as commercial enterprises. Moreover, the performance of these services involves distinct operations and processes. That is why they are also called ‘Service industries’.

Tertiary units bridge the gap between the producers of goods and services and their consumers. They help in removing various hindrances that arise during the production and distribution of goods and services.

The contribution of these industries is stated below:

  1. Transport facilities overcome the barriers of distance and create place utility. Transport widens the market and helps to equalize prices at different places.
  2. Banking provides credit facilities to industrial and trading firms besides providing banking services. Bank also facilitates business activity by providing, safe and quick means for remittance of money.
  3. The insurance covers various kinds of business risks.
  4. Warehousing provides storage facility to the producers and traders. It removes the hindrance of time and thereby creates time utility.
  5. Advertising provides information to consumers.

In short, the above activities help industry and trade through movement, financing, risk, coverage, storage, and promotion of goods.

Question 8.
What are the various sectors of industrial organizations in India? Mention briefly.
Various industrial organizations may be grouped into three sectors as follows:
1. Primary Sector: Primary industries include all those activities which are connected with the extraction, production, and processing of natural resources. Farming, mining, oil drilling, lumbering, fishing, etc. are examples of the primary sector- activities. Genetic and extractive industries come under the primary sector.

2. Secondary Sector: Secondary industries are concerned with the processing materials which have already been produced at the primary state. The output of the primary sector is used as the raw material in the secondary sector production. For example, growing cotton is the primary industry but the manufacture of textiles from cotton is a secondary industry. Steelmaking, ship-building, pottery, oil refinery, carpentry, house-building, interior decoration, plastic manufacturing, etc. are examples of secondary production. The secondary sector consists of manufacturing and construction industries.

3. Tertiary Sector: This sector industries include those services which facilitate a smooth flow of goods and services for satisfying consumer needs.

These services may be classified into two broad categories:
(a) commercial, and
(b) personal.

Commercial services include trading, transport, warehousing, insurance, banking, packaging, advertising, communications, etc. Personal services refer to teaching, nursing, police, medical, detective, entertainment, etc. Thus, tertiary industries provide support services to primary and secondary industries and facilitate trade.

Question 9.
Define the terms small business, tiny units, and ancillary units.
Definition of Small business: A small business may be defined in terms of size. Once a firm goes beyond a certain size, it is no longer classified as small. The size limit for a small firm may be laid down in terms of any one or more of the following criteria, namely,
(a) the amount of capital invested,
(b) the number of persons employed, and
(c) the value of annual turnover.

The small scale enterprises have been classified into three segments: small units, ancillary units (those manufacturing components and spare parts), and tiny units (very small units including handloom and cottage industries.)

The present limit of investment in plant and machinery’ for these segments is as follows:

  1. Tiny Units having an investment in plant and machinery up to Rs. 25 lakhs.
  2. Small Scale Industrial (SSI) units having an investment in plant and machinery up to Rs. 100 lakh (Rs. One Crore).
  3. Ancillary Industrial Units having an investment in plant and machinery up to Rs. 100 lakh.

It has been the policy of the Central Government to give encouragement to entrepreneurs in the small sector. For the growth of small enterprises, the government provides various incentives and concessions in the form of capital subsidy, technical know-how, market, and infrastructural facilities.

Several institutions like State Finance Corporations, Small Scale Industries Corporations, Small Scale Industry’ Development Organisation, Small Industries Service Institutes, Directorate of Industries, District Industries Centres, and Small Industry Development Bank of India have been set up to help the small entrepreneurs in their pursuit.

Despite the growth of multinationals and other big firms, small business has survived and there is considerable scope for setting up small business firms in India. Liberalization and new technology have opened up new areas of small business complementarity to big business.

Nature and Purpose of Business Important Extra Questions Long Answer Type

Question 1.
Explain in detail the social objectives of the business in today’s context.
Social Objectives: Business does not exist in a vacuum. It is an integral part of society and it can achieve its economic objectives only by having deep roots in the society. According to Henry Ford, “The purpose of business is not only earning profit but also discharging responsibilities towards the society,” A business must be guided by social objectives since it is a part of the society and gets men, materials, and machines from the society only.

The decision taken by the business has a great influence on the socio-economic conditions in the country. Business is not merely an economic entity, it is a social institution as well. Therefore, it is in the interest of business to pursue certain objectives that are expected by people.

The social objectives of the business are as follows:
1. Better Quality Goods at Fair Prices – The business must provide better quality products as desired by the customers. Quality means purity as in the case of food items and medicines or safety as in the case of electrical goods or durability as in the case of TV and refrigerator. Consumers prefer the products which are of satisfactory quality and are available at reasonable prices.

In fact, consumers have become increasingly conscious of quality and want value for money. Therefore, an important objective of a business is to produce and supply goods of proper quality to satisfy the expectations of consumers. The prices charged for the goods should also be reasonable.

2. Fair Trade Practices: Anti-social practices include hoarding, black marketing, and adulteration. Making false claims in advertisements to mislead and exploit people is an example of unfair trade practice. Such practices are not only illegal but bring a bad name to the business community. Therefore, businessmen must avoid such means of making money. The business should follow fair business practices all the time.

3. Generation of Employment: Every business should grow and expand its operations to create new frontiers of employment for society. The business has tremendous scope for the generation of employment opportunities. Business must provide employment without any discrimination on account of caste, creed, religion, or sex. Business is expected to give special consideration to handicapped and weaker sections of society in the matter of employment. Business firms that pursue this objective can improve their public image.

4. Employment Welfare – Employees are a valuable asset and they make significant contributions towards the success of the business. It is an important responsibility’ of the business to promote the welfare of the employees. Businesses must recognize the dignity of labor and treat employees as partners rather than as mere working hands. Businesses must provide good working conditions, housing, transport, and medical facilities besides fair wages to their employees.

Question 2.
Can profit be the sole objective of a business? Explain the reasons in favor and against the profit objective of the business.
Can profit be the sole objective of a business? – Despite the indispensable role in business, profit cannot be the all and all of the business. Profit maximization objective is undesirable and social accountability is also the responsibility of business. According to Urwick, “Earning of profits cannot be the objective of a business any more than eating is the objective of living.”

A business unit is an economic entity in which various factors of production are used. Capital is one of the factors of production and the reward for investing capital is given in the form of profit. Therefore, a business should not be run only to maximize the reward of one factor of production, i.e., the capital. Besides’earning profits, it should also aim at the satisfaction of customers, the welfare of workers, community service, etc.

The argument in favor of profit as the sole objective: Earning profits is essential for a business due to the following reasons:

  1. It is a sign of healthy business as profit is the chief motivating factor in business.
  2. It would provide sufficient return to the investors of capital. Profit is considered to be an index of success in business.
  3. It would provide funds for reinvestment in the business.
  4. A profit-making concern enjoys goodwill in society.
  5. The assets of the business would be used for maximizing profits. Misuse of assets would thus be avoided.

Arguments against profit maximization: Profit maximization should not be the sole motive of any business. The arguments against profit maximization are as under:

  1. Profit maximization ignores the interests of labor, customers, and society.
  2. Unfair means such as hoarding, black marketing, or adulteration may be followed to maximize profits.
  3. The long-term interest of the business may-be ignored to maximize profits in the short-run.
  4. In the present-day environment, a business can’t be effective with the sole objective of profit maximization. It must also set objectives in areas like customer satisfaction, social responsibility, environmental protection, research, and development, etc.

The profit-making and social service objectives of the business are not contradictory to each other, they go hand in hand. According to Henery Ford, “Mere money chasing is not business. The businessman who keeps his customers satisfied by service will definitely earn good profits.

To conclude earning profits through service to society is the real objective of the business.

Question 3.
Explain in detail the various types of risks.
Types of Business Risks – Business is subject to a wide variety of risks. The different types of business risks may be classified in the following ways:
1. Pure and Speculative Risks: ‘Pure risks’ are those risks that relate to chances of loss and there is no possibility of profits. For instance, when a fire breaks out there is a chance of loss only, no gain. Theft, accident, strike, lockout, damage in transit are some examples of pure risks. A businessman may avoid, insure or simply assume the pure risks.

‘Speculative risk’ are those risks which make the possibility of both losses or gain depending on the future. For example, the development of a new product may result in a large number of profits or big losses. Changes in demand, price fluctuation, changes in fashion and taste, etc. are examples of speculative risks. Speculative risks can be reduced, avoided, or shifted to others.

The distinction between pure risk and speculative risks may be presented as under:

  1. First, pure risk is always inherent in business whereas speculative risks are deliberately assumed by a businessman.
  2. Secondly, pure risks may or may not result in a loss but they never bring extra gain to the entrepreneur. On the other hand, the speculative risk may cause loss or gain. Thirdly, the pure risk is generally insurable but the speculative risk can not always be insured. Lastly, speculative risk enables a businessman to earn profits while pure risk fails to do so.

The pure risk may be categorized as under:
(a) Personal risks: These risks relate to the individual capacity loss of earning. Old age, sickness, disability, unemployment, premature death, etc. lead to loss of income or assets.

(b) Property risks: Property risks are those risks that relate to the loss of property. Direct physical loss or damage to property, loss of income from the property, non-availability of property for use, additional expenses incurred on the property to make it usable, etc. are examples of property risks.

(c) Liability risks: These risks involve the possibility of loss due to the damages or compensation payable to third parties on account of intentional or unintentional torts or injury to the rights of others.

2. Insurable and non-insurable risks: Insurable risks are those risks that may be avoided by insuring them. Goods in stock or in transit can be insured against fire, theft, etc. The essential features of insurable risks are as follows:
(a) The risk must arise out of the ordinary course of business. It must be accidental without the fault of the insured.
(b) There must be an element of uncertainty as to the occurrence of risk or the time of its occurrence.
(c) The risk must be common to the units insured.
(d) The loss or incidence of risk must be foreseeable and capable of being estimated or measured, with a fair degree of accuracy.
(e) The loss must be large enough to cause hardships.

Non-insurable risks cannot be insured against because their occurrence cannot be forecasted and. determine. In the words of Hall, “Those uncertainties which cannot be forecasted and which are caused due to lack of business entrepreneurship, lack of mental presence, cannot be insured and, therefore, they are non-insurable risks.” Changes in demand and supply, price fluctuations, changes in fashion, etc. are examples of non-insurable risks.

3. Internal and External Risks: Internal risks are those risks that occur during the normal course of business running. Fire, breakdown of machinery, negligence or dishonesty of employees, a strike by the workers of the firm are examples of internal risks. External risks involve those losses which result from forces beyond the control of the business. Changes in market conditions, technological changes, political changes, natural calamities, social disturbances, etc. are examples of external risks. Management has comparatively little control over external risks.

4. Fundamental and Particular Risks: Fundamental or general risks are group risks that affect the general group or large segments of the public. These risks are impersonal in origin and consequence. Floods, earthquakes, cyclones, famine, storms, wars, inflation, unemployment, etc. are examples of fundamental risks. These risks are caused by factors that are beyond the control of the individuals who suffer the loss. Society is expected to shoulder such risks because they are not the fault of any particular individual.

Particular risks relate to individuals responsible for their occurrence. Bank robbery, burning of a factory, murder of a manager, etc. are all particular risks. Such risks are the responsibility of the particular individuals who cause or suffer them.

5. Static and Dynamic Risks: Static risks are those risk which has no bearing on the economy. Such risks lead to the destruction of an asset or changes in its possession. Human factors, dishonesty of employees, natural calamities, etc. are examples of static risks. Dynamic risks affect the economy, e.g., price level fluctuations, changes in income and output, technological changes, changes in consumer tastes, etc. Dynamic risks are the result of adjustments to the misallocation of resources. Therefore, they are a source of gain to society in the long run. Dynamic risks are less predictable as they do not regularly occur.

6. Property and Personal Risks: Property risks relate to the risk of property due to natural or man-made causes. For example, floods may destroy crops. On the other hand, personal risks relate to the risk of the personal life of workers working in the business. Such risks may occur due to accidents, occupational diseases, etc. For instance, a worker may lose his right hand due to an accident while working in the factory.

Question 4.
How the business risks can be prevented? Explain the preventive risks.
Preventing Risks: Various groups interested in business Le. individual, firms, or government plays an important role to prevent the risks arising in the business. The management of an individual firm can take steps for loss prevention and control. Efficient planning and effective control help to reduce risk.

The main techniques of reducing business risks are as follows:
(a) Prediction and Marketing Survey: Improper planning causes many risks in business. Scientific forecasting of future economic conditions makes the management aware of likely opportunities and threats in the future business environment. As a result, management can formulate appropriate plans in advance to meet the challenges of the future.

Marketing surveys help in providing information about market conditions helpful to a businessman can make the necessary change in products, prices, distribution channels, and sales promotion techniques. Efficient market planning help in reducing the risk of over-production, wrong products, defective distribution, etc. An intensive selling campaign may be used to maintain regular demand and to build up brand loyalty among consumers,

(b) Research and development: Losses due to technology change, maybe overcome through scientific research and development. It can develop new and remunerative products before the present products become obsolete! Research and development are also helpful in standardization and control of quality so that consumers can get safe and reliable products.

(c) Credit screening and control: Careful screening of customers and prompt collection of outstanding debts are useful in reducing the possibility of loss through bad debts. Similarly, proper inventory control can reduce the risks of loss.

(d) Safety programs: Risks may be avoided with proper safety programs. Cold storage or refrigeration is helpful in the preservation of perishable products. Special packing may be used to reduce spoilage or leakage of goods in transit or storage. Similarly, steps can be taken to reduce damage by rats, pests, vermin, etc. Medical care facilities help reduce the loss of life on account of accidents in the factory. Adequate lighting, covering of damaged floors, keeping aisles free of obstructions, etc. help reduce accidents.

(e) Training and development of employees: Proper training to successor employees may be helpful to reduce the risk in the care of death, resignation, or incapacity of a key executive. Similarly, training workers helps reduce the incidence of industrial accidents and spoilage.

(f) Business combination: The risk of competition can be reduced through collective action by the competing firms which may agree to restrict output, allocate markets or charge uniform prices. Business combinations can avoid excess supply, a fall in prices, and combative advertising.

(g) Government regulation: Government regulatory mechanism may reduce business risks. The government may impose import duty to protect domestic industry from foreign competition. It may stabilize prices, freight rates, taxes, etc. to make the environment of business less risky.

Question 5.
Mention the activities auxiliaries or Territory to trade.
Auxiliaries To Business/Trade: (Tertiary Activities or Aids to Trade, Business, and Industry): Activities that assist or support the trade are known as auxiliaries to business or trade. They are an integral part of commerce. These include transport, warehousing, insurance, financing and banking, and other allied services which are known as aids to trade.

These services are discussed below:
1. Transportation: Transport helps in removing the hindrance of place in the exchanges of goods and services. It results in the equitable distribution of goods in far-flung areas. Transport has linked all parts of the world with the help of efficient means of transport.

2. Banking: Banks provide a device through which’ payments of goods bought and sold are facilitated. In other words, banks facilitate the purchase and sale of goods on credit. Banks also perform the useful economic function of collecting the savings Of the people and business houses and making them available to those who may profitably use them. Thus, banks may be regarded as traders in money and credit.

3. Insurance: With the help of insurance, a businessman can protect himself from various risks. An insurance company performs a useful service of compensating for the loss arising from the damage caused to the insured goods through fire, pilferage, theft, flood, and the hazards of sea transportation. Insurance is based on the “pooling of risks” principle.

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. Storage creates time utility and removes the hindrance of time in the trade. Warehousing these days has become an important element of the business.

5. Advertising: Advertising and publicity inform the consumers about the availabilities of products & services. In the absence of advertising, goods would not have been so due to a widely scattered market. It is through advertising that the customers come to know about the new products and their utility. Because of the physical spatial distance between the producers and the consumers, advertising is necessary to bridge the information gap.

5. Packaging: Packaging is traditionally done to protect the goods from damage in transit and to facilitate the easy transfer of goods to customers. Packaging helps in the conveyance and handling of goods safe and free from spoilage. Trade and Transport of goods have become easier and safer due to improvement in methods of packaging.