1st PUC Business Studies Question Bank Chapter 1 Nature and Purpose of Business

Karnataka 1st PUC Business Studies Question Bank Chapter 1 Nature and Purpose of Business

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1st PUC Business Studies Nature and Purpose of Business Textual Questions and Answers

1st PUC Business Studies Nature and Purpose of Business Multiple Choice Questions

Question 1.
Which of the following does not characterize business activity?
(a) Production of goods and services
(b) Presence of risk
(c) Sale or exchange of goods and services
(d) Salary or wages
Answer:
(d) Salary or wages

Question 2.
Which of the broad categories of industries covers oil refinery and sugar mills?
(a) Primary
(b) Secondary
(c) Tertiary
(d) None of them
Answer:
(b) Secondary

Question 3.
Which of the following cannot be classified as an auxiliary to trade?
(a) Mining
(b) Insurance
(c) Warehousing
(d) Transport
Answer:
(a) Mining

Question 4.
‘The occupation in which people work for others and get remunerated in return is known as
(a) Business
(b) Employment
(c) Profession
(d) None of them
Answer:
(b) Employment

Question 5.
The industries which provide support services to other industries are known as
(a) Primary industries .
(b) Secondary industries
(c) Commercial industries
(d) Tertiary industries
Answer:
(d) Tertiary industries

Question 6.
Which of the following cannot be classified as an objective of business?
(a) Investment
(b) Productivity
(c) Innovation
(d) Profit earning
Answer:
(a) Investment

Question 7.
Business risk is not likely to arise due to
(a) Changes in government policy
(b) Good management
(c) Employee dishonesty
(d) Power failure
Answer:
(b) Good management

1st PUC Business Studies Nature and Purpose of Business Short Answer Questions

Question 1.
State the different types of economic activities.
Answer:
Economic activities are those by which we can earn our livelihood. Economic activities may be further divided into three categories, namely business, profession and employment, e.g., a person running a garment business, a doctor operating in his clinic, and a teacher teaching in a school- all three are doing so to earn their livelihood and are, therefore, engaged in an economic activity.

Question 2.
Why is business considered an economic activity?
Answer:
Business may be defined as an economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society. Business is considered to be an economic activity because it is undertaken with the aim of earning money or livelihood and not because of any – sentimental reason like love, affection or sympathy.

Question 3.
Explain the concept of business.
Answer:
The term ‘business’ is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to any occupation in which people regularly’ engage in an activity with an objective of earning profit. The activity may consist of production or purchase of goods for sale, or exchange of goods or supply of services to satisfy the needs of other people in the society.

Question 4.
How would you classify business activities?
Answer:
Various business activities may be classified into two broad categories industry-‘ and commerce. Industry is concerned with the production or processing of goods and materials. Industries may be divided into three broad categories namely primary, secondary and tertiary. Commerce includes all those activities which, are necessary for facilitating the exchange of goods and services. Commerce includes two types of activities, viz.

1. trade and
2. auxiliaries.

Question 5.
What are various types of industries?
Answer:
Industry refers to economic activities, which are connected with conversion of resources into useful goods. Industries may be divided into three broad categories namely primary, secondary and tertiary.

1. Primary Industries include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc.
2. Secondary Industries are concerned with using or processing the materials which have already been extracted at the primary stage.
3. Tertiary Industries are concerned with providing support services to primary and secondary industries. They also include activities relating to trade.

Question 6.
Explain any two business activities which are auxiliaries to trade.
Answer:
Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of facilitating the activities relating to industry and trade. Two business activities which are auxiliaries to trade are

(i) Transport and Communication: Production of goods generally takes place in particular locations. Transport facilitates movement of raw material to the place of production and the finished products from factories to the place of consumption. Communication facilities help the producers, traders and consumers in exchanging information with one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities.

(ii) Warehousing: Goods are not sold or consumed immediately after production. They are held 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.

Question 7.
What is the role of profit in business?
Answer:
Every business operates with an aim to earn more than what has been invested and profit is the excess of revenue over cost.
Profit plays an important role in business

1. It is a source of income for business persons.
2. It can be a source of finance for meeting expansion requirements of business.
3. It indicates the efficient working of business.
4. It can be taken as society’s approval of the utility of business.
5. It builds up the reputation of a business enterprise.

Question 8.
What is business risk? What is its nature?
Answer:
The term ‘business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Business risks are of two types: speculative and pure. Speculative risks involve both the possibility of gain as well as the possibility of loss’ Speculative risks arise due to changes in market conditions, changes in prices or changes in fashion and tastes of customers. Pure risks involve only the possibility of loss or no loss. The’chances of fire, theft or strike are examples of pure risks.

Nature of business risks can be understood in terms of the following characteristics

1. Business risks arise due to uncertainties.
2. Risk is an essential part of every business.
3. Degree of risk depends mainly upon the nature and size of business.
4. Profit is the reward for risk taking.

1st PUC Business Studies Nature and Purpose of Business Long Answer Questions

Question 1.
Explain the characteristics of business.
Answer:
Business refers to any occupation in which people regularly engage in an activity with ‘ an objective of earning profit. The activity may consist of production or purchase of goods for sale, or exchange of goods or supply of services to satisfy the needs of other people in the society. Business has the following characteristics.

(i) Economic Activity : Business is considered to be an economic activity because it is undertaken with the aim of earning money or livelihood and not because of any sentimental reason like love, affection or sympathy.

(ii) Production or Procurement of Goods and Services: Goods are offered to consumers after they are either produced or procured by business enterprises. Thus, every business enterprise either manufactures the goods it deals in or it acquires them from other producers, to be further sold to consumers or users. Goods may be consumer goods like television, tea, pen, etc or capital goods like machinery, furniture, etc Services may include facilities offered to consumers in the form of transportation, banking, electricity, etc.

(iii) Sale or Exchange of Goods and Services: Business involves transfer or exchange of goods and services for value addition. If goods are produced for self consumption and not for selling purpose, it cannot be .called a business activity Cooking food at home for the family is not business, but cooking food and selling it to others in a restaurant is business. Thus, one essential characteristic of business is that there should be sale or exchange of goods or services between the seller and the buyer.

(iv) Regular Dealings in Goods and Sendees: Business involves dealings in goods or services on a regular basis. Therefore, one single transaction of sale or purchase does not constitute business, e.g., if a person sells his/her old washing machine even at a profit, it will not be considered a business activity. But if he/she sells washing machines regularly it will be termed as a business.

(v) Profit Earning : One of the main objectives of business is to earn profit. No business can survive for long without earning profit. It is a source of income for business persons and~a source of finance for meeting expansion requirements of business. Hence, businessmen make all possible efforts to maximize profits, by increasing the sales revenue or reducing costs.

(vi) Uncertainty of Return : Uncertainty of return refers to the lack of knowledge relating to the amount of money that the business is going to earn in a given period. Every business invests capital in its activities with the objective of earning profit. But it is not certain as to what amount of profit will be earned. There is even a possibility of losses being incurred even after the best efforts.

(vii) Element of Risk: Risk involves the possibility of inadequate profits or even losses due to uncertainties-or unexpected events. It is caused by some unfavorable or undesirable event. The risks are related with certain factors like changes in consumer tastes and fashions, changes in methods of production, strike or lockout in the workplace, increased competition in the market, fire, theft, accidents, natural calamities, etc. No business can eliminate risks altogether.

Question 2.
Compare business with profession and employment.
Answer:
Economic activities may be divided into three major categories

(i) Business: Business refers to those economic activities, which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit. People engaged in business earn income in the form of profit.

(ii) Profession: Profession includes those activities, which require special knowledge and skill to be applied by individuals in their occupation. Those engaged in professions are known as professionals and are generally subject to guidelines or codes of conduct laid down by professional bodies, e.g., lawyers are engaged in the legal profession, governed by the Bar Council of India and Chartered Accountants belonging, to the accounting profession are subject to the regulations of the Institute of Chartered Accountants of India.

(iii) Employment: Employment refers to the occupation in which people work for others and get remunerated in return. Those who are employed by others are known as employees. Thus, people who work in factories, offices of banks, insurance companies or government department, etc. at various posts are the employees of these organizations. They receive wages and salaries.

S. No	Basis	Business	Profession	Employment
1.	Mode of establishment	Entrepreneur’s decision and other legal formalities, if necessary.	Membership of a professional body and certificate of practice.	Appointment letter and service agreement.
2.	Nature of work	Provision of goods and services to the public.	Rendering of personalized, expert services.	Performing work as per service contract or rules of service.
3.	Qualification	No minimum qualification is necessary.	Expertise and training in a specific field is must.	Qualification and training as prescribed by the employer.
4.	Reward or return	Profit earned.	Professional fee.	Salary or wages.
5.	Capital investment	Capital investment’ required as per size and nature of business.	Limited capital needed for establishment.	No capital required.
6.	Risk	Profits are uncertain and irregular; risk is present.	Fee is generally regular and certain; some risk.	Fixed and regular pay; no or little risk.
7.	Transfer of interest	Transfer possible with some formalities.	Not possible.	Not possible.
8.	Code of conduct	No code of conduct is prescribed.	Professional code of conducts is to be followed.	Norms of behavior laid down by the employer are to be followed.

Question 3.
Explain with example the various types of industries.
Answer:
Industry refers to economic activities, which are connected with conversion of resources into useful goods, Industry is concerned with the production or processing of goods and materials as well as breeding and raising of animals. The term industry is used for activities in which mechanical appliances and technical skills are involved. The term industry is also used to mean groups of firms producing similar or related goods. Services such- as banking and transport are also referred to as industries. Industries may be divided into three broad categories namely primary, secondary and tertiary.

(i) Primary Industries:
These include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. These industries may be further subdivided as follows.

(a) Extractive Industries: These industries extract or draw out products from natural sources. Extractive industries are suppliers of basic raw materials that are mostly products of the geographical or natural environment. Products pf these industries are usually transformed into useful goods by manufacturing industries. Farming, mining, lumbering, hunting and fishing-operations are some important extractive industries.

(b) Genetic Industries: These industries are concerned with breeding of plants and animals for their use in further reproduction. Seeds and nursery companies, cattle breeding farms, poultry farms, and fish hatchery are examples of genetic industries.

(ii) Secondary industries:
These are concerned with using and processing the materials, which have already been extracted by the primary sector to produce goods for final consumption or for further processing by other industrial units, e.g., the iron ore extracted by mining which is a primary industry, is processed into steel and hence, steel industry is a secondary industry. Secondary industries may be further divided as follows

(a) Manufacturing Industries: These industries are engaged in producing goods for intermediate or final consumption through processing of raw materials and thus creating form utilities. Manufacturing industries may be further divided into four categories on the basis of method of operation for production.

• Analytical Industry which analyses and separates different elements from the same materials, e.g., oil refinery?
• Synthetically Industry which combines various ingredients into a new product, e.g., cements industry.
• Processing Industry which involves successive stages for manufacturing finished products, e.g., sugar and paper industries.
• Assembling Industry which assembles different component parts to make a new product, e.g., car and computer industries.

(b) Construction Industries: These industries are involved in the construction of buildings, dams, bridges, roads, tunnels and canals. Engineering and architectural skills play an important role in construction industries. These industries are important for infrastructure development.

(iii) Tertiary Industries: These comprise of support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities. These may be considered as a part of commerce because as auxiliaries to trade they assist trade. Transport, banking, insurance, warehousing, communication, packaging and advertising are examples of tertiary industries.

Question 4.
Describe the activities relating to commerce.
Answer:
Commerce includes two types of activities, viz.
(i) trade and
(ii) auxiliaries to trade.
Buying and selling of goods is termed as trade. On the other hand, activities that are required to facilitate the purchase and sale of goods are called services or auxiliaries to trade. The various activities included in commerce are discussed below

(i) Trade
The hindrance of persons is removed by trade thereby making goods available to the consumers from the producers. Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods. It helps in making the goods produced available to ultimate consumers or users. Businessmen are engaged in trading activities as middlemen like wholesalers and retailers to make the goods produced at a large scale in one place, available to consumers in different markets. Trade may be internal or external.

(ii) Auxiliaries to Trade
Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of support service facilitating the activities relating to industry and trade. These activities help ’.in removing various hindrances which arise in connection with the production and distribution of goods. Auxiliaries to trade are briefly discussed below

(a) Transport and Communication: Transport removes the hindrance of place. Transport facilitates through road, rail or coastal shipping facilitate movement of raw material to the place of production and the finished products from factories to the place of consumption. Along with the transport facility, there is also a need for communication facilities to enable the producers, traders and consumers to exchange information with one another. Thus, postal services and telephone facilities are also regarded as auxiliaries to business activities.

(b) Banking and Finance: Capital required to acquire assets and meeting the day-to-day expenses is provided by banking and financial institutions. Commercial banks lend money to business organizations by providing loans and advances. Banks also undertake collection of cheques, remittance of funds to different places, and discounting of bills on behalf of traders. In foreign trade, payments are arranged by commercial banks on behalf of importers and exporters.

(c) Insurance The risk of loss or damage to the factory building, machinery, furniture, goods held in stock or goods in course of transport due to theft, fire, accidents, etc is removed by insurance of goods. By payment of a nominal premium, the amount of loss or damage and compensation for injury, if any. can be recovered from the insurance company.

(d) Warehousing: Storage and warehousing activities remove the hindrance of time by facilitating holding of stocks of goods to be sold as and when required. Warehousing helps business firms to overcome the problem of storage to prevent loss or damage and facilitates the availability of goods when needed. Continuous supply of goods and thus stable prices can thus be maintained.

(e) Advertising: Advertising makes it possible for producers and traders to promote the goods and services available in the market thus removing the hindrance of information. It is practically impossible for producers and traders to contact each and every customer. Advertising helps in providing information about the goods available, its features, price, etc, and inducing customers to buy particular items.

Question 5.
Why does business need multiple objectives? Explain any five such objectives.
Answer:
Need for Multiple Objectives: It is generally believed that profit earning is the primary objective of business. However, as per modern thinking, business needs to have several objectives. Consistent and sustainable profit can be earned only if the business performs useful services to society. Business requires multiple objectives since it has to balance a number of needs and goals related to various aspects of society. Following only one objective cannot lead business towards excellence. Objectives are needed in every area where performance and results affect the survival and prosperity of business.

Five of the objectives of business are described below

(i) Profit Maximization
Profit is defined as excess of revenue over cost. Profitability refers to profit in relation to capital investment. Although, earning profit cannot be the only objective of business, its importance cannot be ignored. Every business makes an attempt to reap maximum profit as possible in the given market conditions. Profit may be regarded as an essential objective of business for various reasons :

1. It is a source of income for business persons.
2. It can be a source of finance for meeting expansion requirements of business.
3. It indicates the efficient working of business.
4. It can be taken as society’s approval of the utility of business.
5. It builds up the reputation of a business enterprise.

(ii) Market Standing
Market standing refers to the position of an enterprise in relation to its competitors. A business enterprise must aim at standing on stronger footing in terms of offering competitive products to its customers and provide customer satisfaction.

(iii) Innovation
Innovation is the introduction of new ideas or methods. There are two kinds of innovation in every business

(a) Product Innovation : In product innovation a new product or service or an improved version of existing product is developed

(b) Process Innovation: This involves innovation in the methods, skills and activities needed to produce or supply products. Product demand starts declining after a span of time. At this stage, the business must introduce a new innovation to create fresh demand for the existing product by introducing new features in it or bring out a new product to sustain in the market.

(iv) Productivity
Productivity is calculated by comparing the value of outputs with the value of inputs. It is used as a measure of efficiency. Higher productivity leads to reduction in costs as the same amount of output is produced with lesser amount of inputs. This ensures survival and growth of the enterprise.

(v) Social Responsibility
Every business operates within a society. It uses the resources of the society and depends on the society for its functioning. This creates an obligation on the part of business to look after the welfare of society. So, all the activities of the business should be such that they will not harm, rather they will protect and contribute to the interests of the society. The activities of business towards the welfare of the society earn goodwill and reputation for the business in the eyes of consumers as well as government.

Question 6.
Explain the concept of business risk and its causes.
Answer: The term ‘business risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events, e.g., decline in demand for a product due to change in tastes and preferences of consumers resulting in lesser sales and profits; shortage of raw materials in the market leading to rise in its price and in turn raising cost for the business which uses them thereby reducing profits.

Business risk is of two types:

(i) Speculative Risks : involve both the possibility of gain as well as the possibility of loss. Speculative risks arise due to changes in market conditions including fluctuations in demand and supply, changes in prices or changes in fashion and ‘tastes of customers.

(ii) Pure Risks : involve only the possibility of loss or no loss. The chance of fire, theft or strike is example of pure risks. Their occurrence may result in loss whereas non-occurrence may explain absence of loss, instead of gain. Business risks arise due to a variety of causes, which are classified as follows

(a) Natural Causes
Natural calamities like flood, earthquake, lightning, heavy rains, famine, etc are beyond human control. They result in heavy loss of life, property and income.

(b) Human Causes
Human causes include such unexpected events like carelessness, negligence or dishonesty of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.

(c) Economic Causes
These include uncertainties caused due to economic fluctuations such as changes in demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems like rise in interest rate and higher taxation, etc also come under economic causes as they raise the cost of operation of business unexpectedly.

(d) Other Causes
These are unforeseen events ‘like .political disturbances, mechanical failures, fluctuations in exchange rates, etc which lead to the possibility of business risks.

Question 7.
What factors are important to be considered while starting a business? Explain.
Answer:
Business firms encounter some basic problems while starting a business. Various decisions have to be taken regarding the business while, starting it. Some of the basic factors to be considered while starting a business are as follows:

(i) 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. One should enter an industry which is in growth phase and thus has a higher possibility of profits. Technical knowledge and interest the entrepreneur has for producing a particular product is also important in this regard. ‘

(ii) Size of the Firm : Size of the firm refers to the scale of its operation. Business can be started at a large scale if the entrepreneur is confident that the demand for the proposed product is likely to be high over time and he has the necessary skills and capital for business. Business should be started at a small or medium scale if the market conditions are uncertain and risks are high.

(iii) Form of Ownership: There are various forms of ownership in a business organization like sole proprietorship, partnership or a joint stock company. The choice of the suitable form of ownership will depend on such factors as the capital requirements, liability of owners, division of profit, transferability of interest and so on.

(iv) Location of Business Enterprise: Plant location is an important factor to be considered at the start-of the business. Availability of raw materials and labor; power supply and services like banking, transportation, communication, warehousing, etc, are important factors while making a choice of location.

(v) Financing Decisions: Financing is concerned with providing the necessary capital for starting as well as for continuing the proposed business. Capital is required for investment in fixed assets and current assets. Proper financial planning must be done to determine the requirement, source and allocation of funds.

(vi) Physical Facilities: Availability of physical facilities including machines and equipment, building and supportive sendees is a very important factor to be considered at the start of the business. The decision relating to this factor will depend on the nature and size of business, availability of funds and the process of production.

(vii) Plant Layout: Plant layout refers to a layout plan showing the arrangement of ” physical facilities such as machines and equipments for production. It should be drawn by the entrepreneur after deciding about the scale of operation and physical facilities to be acquired.

(viii) Competent and Committed Employees: in present time, the most crucial resource for a business is the human resource. Every business depends on the competence and commitment of its work force to perform various activities so that physical and financial resources are converted into desired outputs in an efficient and effective manner.

(ix) Tax Planning: Every business has to pay certain taxes as levied by the government. Tax planning and management for reducing tax liability as far as possible is acceptable both legally and ethically. The entrepreneur must consider in advance the tax liability under various tax laws and its impact on business decisions.

(x) Launching the Enterprise: After the. decisions relating to the above mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise which .would mean mobilizing various resources, fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign.

1st PUC Business Studies Nature and Purpose of Business Additional Questions and Answers

1st PUC Business Studies Nature and Purpose of Business Multiple Choice Questions

Question 1.
The possibilities of inadequate profits or even losses due to uncertainties are known as …………….. .
(a) Business contingencies
(b) Business risks
(c) Business ventures
(d) None of these
Answer:
(b) Business risks

Question 2.
Which one of the following may not be a factor behind starting a business?
(a) Routine workload
(b) size of the firm
(c) finance
(d) location of the business
Answer:
(a) Routine workload

Question 3.
Name the two broad categories of business activities.
(a) Trade and commerce
(b) trade and industry
(c) industry and commerce
(d) none of these
Answer:
(c) industry and commerce

Question 4.
Commerce includes activities relating to trade and ………………… to trade.
(a) Supporting
(b) subsidiaries
(c) auxiliaries
(d) none of these
Answer:
(c) auxiliaries

Question 5.
‘Earning of profit is considered to be the subsidiary objective of the business.’ The given statement is.
(a) True
(b) false
(c) cannot say
Answer:
(b) false

Question 6.
Following are the characteristics of business risks. One of then is not correct. Please identify it.
(a) Loss is the reward for risk bearing
(b) Business risks are due to uncertainties
(c) Risk is an essential component of every business
(d) Degree of risk depends mainly upon the nature and size of business
Answer:
(a) Loss is the reward for risk bearing

Question 7.
Transfer of interest exists in the case of
(a) Profession
(b) employment
(c) business
(d) none of these
Answer:
(c) business

Question 8.
Human activities are of ………………… types
(a) One
(b) two
(c) three
(d) four
Answer:
(b) two

Question 9.
Which of the following is not an example of non-economic activity?
(a) Patriotism
(b) teaching
(c) sentiment
(d) sympathy
Answer:
(b) teaching

Question 10.
Economic activities may be classified into business, ………………….. and employment
(a) Profession
(b) occupation
(c) vocation .
(d) work
Answer:
(a) Profession

1st PUC Business Studies Nature and Purpose of Business Short Answer Questions

Question 1.
Define Business.
Answer:
An organization or economic system where goods and services are exchanged for one another or for money. Every business requires some form of investment and enough customers to whom its output can be sold on a consistent basis in order to make a profit. Businesses can be privately owned, not-for-profit or state-owned. An example of a corporate business is PepsiCo, while a mom-and-pop catering business is a private enterprise.

Question 2.
Define Profession.
Answer:
Occupation, practice, or vocation requiring mastery of a complex set of knowledge and skills through formal education and/or practical experience. Every organized profession (accounting, law, medicine, etc.) is governed by its respective professional body.

Question 3.
Define Employment.
Answer:
Employment is a relationship between two parties, usually based on a contract where work is paid for, where one party, which may be a corporation, not-for-profit organization, co-operative or other entity is the employer and the other is the employee. Employees work in return for payment, which may be in the form of an hourly wage, by piecework or an annual salary, depending on the type of work an employee does or which sector she or he is working in.

Question 4.
What is commerce?
Answer:
Commerce is the activity of buying and selling of goods and services, especially on a large scale. The system includes legal, economic, political, social, cultural and technological systems that are in operation in any country or internationally.

Question 5.
What is industry?
Answer:
Industry is the production of goods or related services within an economy. The major source of revenue of a group or company is the indicator of its relevant industry. When a large group has multiple sources of revenue generation, it is considered to be „ working in different industries.

Question 6.
What is warehousing?
Answer:
A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings ip industrial areas of cities, towns and villages.

Question 7.
What is communication?
Answer:
It is a process of transmission of information among persons and places. With the development of a communication network, the world has become a small village. Most of the business communication is made through various means like correspondence, radio, television, telephone, fax, e-mail, internet etc. and most of the trade dealings are performed by way of such communication. Thus, communication is an important aid for trade and commerce.

Question 8.
What is advertising?
Answer:
Advertising is an audio or visual form of marketing communication that employs an openly sponsored, no personal message to promote or sell a product, service or idea. Sponsors of advertising are often businesses who wish to promote their products or services. Advertising is differentiated from public relations in that an advertiser usually pays for and has control over the message.

Question 9.
What is business risk?
Answer:
Business risk is the possibilities a company will have lower than anticipated profits or experience a loss rather than taking a profit. Business risk is influenced by numerous, factors, including sales volume, per-unit price, input costs, competition, the overall economic climate and government regulations.

1st PUC Business Studies Nature and Purpose of Business Long Answer Questions

Question 1.
Explain the importance of profit in business.
Answer:
Importance of Profit in Business are as follows:
Profit is a reward for risk-taken in the business. Business is the wealth-creating institution of society. Every business operates in order to earn profit. The main goal of a business is making profit. A business may have other goals but if they do not make profit then they will have to end the business. The importance of profit can be explained with the help of following points:

i. Employment generation
Profits lead to an inducement to invest as well as to innovate. As the entrepreneur begins to forecast more profits he undertakes more investment which in turn creates more employment. This will generate more incomes which in turn, will create more demand for the goods in the market.

ii. Profit is essential for the survival of business
Profit is necessary for the survival and growth of business enterprise. If the business does not make enough profit it will not survive in the growing competitive world. Profit means survival. It enables the business to grow, helps employee motivation, eases negotiations with banks, attracts investors, and gives clients and customers a confidence in business. All that adds up to success.

iii. Reward for risk taken
Profit is a reward for risk taken in the business. It is a return on investment. Business expects highest profit as they expect return on their investment. A firm invests money with the expectation of higher returns on their investment. The shareholders expect higher returns in the form of dividend. Banks and financial institutions expect better rate of interest on the loan given to the business enterprise.

iv. Profit is an indicator of efficiency
Profit is a yardstick that tests the efficiency of the business firm. The success of the business can be judged by the extent of profit earning capacity.

v. Reserves to meet future contingencies
Profit can be used to meet future contingencies. The business is subject to many risk and uncertainties such as changing customer preferences, increasing competition, changing government policies etc. In such cases profit is used to meet those unfavorable business conditions.

vi. Increases volume of business
Retention of profit is the internal source of funds. This profit can be used for increasing the volume of business through expansion and diversification. The portion of profit is re-invested in the business for further development.

Question 2.
What is the classification of business risk?
Answer:
The Business risk is classified into different 5 main types:

i. Strategic Risk
They are the risks associated with the operations of that particular industry. These kind of risks arise from

• Business Environment: Buyers and sellers interacting to buy and sell goods and services, changes in supply and demand, competitive structures and introduction of new technologies.
• Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances and joint ventures.
• Investor Relations: Strategy for communicating with individuals who have invested in the business.

ii. Financial Risk
These are the risks associated with the financial structure and transactions of the particular industry.

iii. Operational Risk
These are the risks associated with the operational and administrative procedures of the particular industry.

iv. Compliance Risk (Legal Risk)
These are risks associated with the need to comply with the rules and regulations of the government.

v. Other Risks
There would be different risks like natural disaster(floods) and others depend upon the nature and scale of the industry.

Question 3.
Explain the objective of business in detail.
Answer:
Your business objectives are the results you hope to achieve and maintain as you run and grow your business. As an entrepreneur, you are concerned with every aspect of your business and need to have clear goals in mind for your company. Having a comprehensive list of business objectives creates the guidelines that become the foundation for your business planning.

i. Profitability
Maintaining profitability means making sure that revenue stays ahead of the costs of doing business, according to James Stephenson, writing for the “Entrepreneur” website. *. Focus on controlling costs in both production and operations while maintaining the profit margin on products sold.

ii. Productivity
Employee training, equipment maintenance and new equipment purchases all go into company productivity. Your objective should be to provide all of the resources your . employees need to remain as productive as possible.

iii. Customer Service
Good customer service helps you retain clients and generate repeat revenue. Keeping your customers happy should be a primary objective of your organization.

iv. Employee Retention
Employee turnover costs you money in lost productivity and the costs associated with recruiting, which include employment advertising and paying placement agencies. Maintaining a productive and positive employee environment improves retention, according to the Dun and Bradstreet website.

v. Core Values
Your company mission statement is a description of the core values of your company, according to the Dun and Bradstreet website. It is a summary of the beliefs your company holds in regard to customer interaction, a responsibility to the community and employee satisfaction. The company’s core values become the objectives necessary to create a positive corporate culture.

vi. Growth
Growth is planned based on historical data and future projections. Growth requires the careful use of company resources such as finances and personnel,, according to Tim Berry, writing on the “Entrepreneur” website.

vii. Maintain Financing
Even a company with good cash flow needs financing contacts in the event that capital is needed to expand the organization, according to Tim Berry, writing on the “Entrepreneur” website. Maintaining your ability to finance operations means that you can prepare for long-term projects and address short-term needs such as payroll – and accounts payable.

viii. Change Management
Change management is the process of preparing your organization for growth and creating processes that effectively deal with a developing marketplace. The objective of change management is to create a dynamic organization that is prepared to meet the challenges of your industry.

ix. Marketing
Marketing is more than creating advertising and getting customer input on product changes. It is understanding consumer buying trends, being able to anticipate product ‘ distribution needs and developing business partnerships that help your organization to improve market share. ’

x. Competitive Analysis
A comprehensive analysis of the activities of the competition should be an ongoing business objective for your organization. Understanding where your products rank in the marketplace helps you to better determine how to improve your standing among consumers and improve your revenue. ..

Question 4.
Explain in detail about the classification of business activities into Industry and Commerce.
Answer:
Business activities may broadly be classified into two categories namely (A) Industry and (B) Commerce. Industry involves production of goods and services whereas commerce is concerned with the distribution of goods and services.

Industry
Industry is concerned with the making or manufacturing of goods. It is that constituent of production which is involved in changing the form of goods at any stage from raw material to the finished product, e.g., weaving woolen yarn into cloth. Thus, industry imparts ‘form utility’ to goods.

The goods produced may either be used by other enterprises as raw materials for further production, they are known as “producers goods”. The production of plant, machinery equipment etc. are, examples of producers’ goods. When goods are finally used by consumers they are known as consumers’ goods. The examples of such goods are cloth, bread, groceries, drugs, etc.

An enterprise may produce materials which will further be processed by yet another concern for converting them into finished goods. These goods are known as intermediate goods. The examples of this category are—plastics, rubber, aluminium, etc.

Classification of industries:
Industries may be classified as to the types of goods produced, scale of investment and type of technology employed.

I. On the basis of type of goods produced:
The industries may be classified on the basis of the type of goods produced as follows:

(i) Primary and Genetic Industry
Genetic industry is related to the re-producing and multiplying of certain species of animals and plants with the object of earning profits from their sale. Nurseries, cattle breeding, fish hatcheries, poultry farms are all covered under genetic industry. The plants are grown and birds and animals are reared and then sold on profit. No doubt nature, climate and environment play an important part in these industries but human skill is also important.

(ii) Extractive Industry
The extractive industry is engaged in raising some form of wealth from the soil, climate, air, water or from beneath the surface of the earth. These industries are classified into two categories. In the first category, workers merely collect goods already existing. Mining, fishing, and hunting is covered in this category. In the second category’, the goods are to be produced by the application of human skill, i.e., agriculture and forestry.Extractive industries supply basic raw materials that are mostly the products of the soil. Products of these industries are usually transformed into many useful products by manufacturing industries.

(iii) Construction Industry
This industry is engaged in the creation of infrastructure for smooth development of the economy. It is concerned with the construction, erection or fabrication of products. These industries are engaged in the construction of buildings, roads, dams, bridges, and canals. These industries use the products of other industries such as cement, iron, bricks and wood, etc. Engineering and architectural skills play an important part in construction industry. Engineering and constructing firms are organised for undertaking operations of construction industry.

(iv) Manufacturing Industry
This Industry is engaged in the conversion of raw materials into semi-finished or finished goods. This industry creates form utility in goods by making them suitable for human use. Most of the goods which are used by consumers are produced by manufacturing industries. These industries supply machines, tools and other equipment are to other industries too.

The products of extractive industry are generally used as raw materials by manufacturing industry.which may be classified as follows:

(a) Analytical Industry
In this industry, a product is analysed and many products are received as final products. In the processing of crude oil we will get kerosene, petrol, gas and diesel, etc.

(b) Processing Industry
In this industry a product passes through various processes to become a final product. The finished product of one process becomes the raw material of the receiving process and soon the final process produces the finished goods. In case of cotton textiles, cotton passes through ginning, weaving and dyeing processes to become cloth. Sugar industry and paper industry are other examples of processing.

(c) Synthetic Industry:
In this industry many raw materials are brought together in manufacturing process to – make a final product. In manufacturing cement, rocks, gypsum, coal etc. are required. Soap making, paints are the other examples of synthetic industry.

II. On the basis of size and investment:
Industries may further be divided on the basis of their size and investment:

(i) Large Scale Industry
Though there may not be any hard and fast rule for such classification but government has fixed certain limits on investments which differentiate between large scale and small scale industries. At present the industries investing more than Rs. 3 crore in plant and machinery in manufacturing units and in ancillary units are covered in large scale.sector. Large scale units are in a position to use latest methods of production and economise on various inputs.

(ii) Small Scale Industry
The units having an investment upto Rs. 1 crore in plant and machinery are small units. A small scale unit has the disadvantage of lower production and comparatively higher cost of production.

III. On the basis of technology employed
Different units use different types of technology. This classification may be as follows:

(i) Heavy Industry
The industry engaged in the production of machinery, steel, power generation are called heavy industry. These units need heavy investments and employ complex technology in production.

(ii) Light Industry
Industries engaged in producing consumer goods etc. arc called light industries. The production technology is simple and machinery used is inexpensive.

Commerce
All those activities which are connected with taking goods and services from producers to users come under the purview of commerce. The goal of commerce is to ensure a proper flow of goods and services for the benefit of both producers and consumers. People are able to buy goods produced anywhere in the world with the help of commerce.

Commerce activities may precisely be described as follows:

1. Commerce is related to the activities dealing with distribution and exchange of goods and services. These activities relate to trade aspect.
2. Commerce covers all the activities which smoothen or help trade. The activities are transport, banking, insurance, warehousing, advertising, etc. These are ancillary services and are called aids to trade.
3. Commerce is a part of business. Business is a wider concept and includes industry too.
4. Commerce is a part of economics. Economics is a study of human beings as consumers and producers and it has a much wider scope than commerce.

Business and Profession
Business is a sum total of activities pursued with a purpose to produce and accumulate wealth. A profession is also adopted to earn a living. The purpose of both business and profession is to earn a living. Though both look similar yet there is a difference between the two.

Business and Employment
In employment a person serves an employer under certain agreement and is paid an agreed remuneration. A business, on the other hand, is working for himself and aiming at earning profit out of it.

Question 5.
List and explain the different types of commerce?
Answer:
Goods produced by an industry should be distributed on time to the appropriate market either by the producer himself or through any middleman. It is commerce, which makes the entire management for the distribution of goods with the help of necessary services. Hence, commerce is the process of distribution of goods in different places. It is an organized system of buying and selling goods, its transportation, insurance, * banking, warehousing and communication etc. between the trading parties. Commerce is divided as trade and auxiliary services.

I. Trade
Trade refers to the purchase and sale of goods between the parties. It is the process by which goods are transferred from the producers to the customers and consumers along with their ownership.

a. Home trade
The trade, which is dealt with in the boundary of one country, is known as home trade. It is also of two types wholesale trade and retail trade. Wholesale trade is the one which deals with a large quantity of goods by purchasing from the producers or authorized suppliers and selling them to the retailers. Retail trade is that in which goods are bought from wholesalers and sold to the ultimate consumers.

b. Foreign Trade
The trade, which is dealt between two or more countries, is known as foreign trade. The buying and selling the goods in the foreign trade are termed as import and export. Hence, foreign trade is further divided into import and export trade. Import trade implies to the purchase of goods from a foreign country. The purchasing act is known as import and the party importing goods is known as importer. Export trade implies to the sale or supply of goods to a foreign country. The selling act is known as export and the party exporting the goods is known as exporter.

II. Auxiliaries of Trade
Auxiliaries of trade refer to the integration of all the agency services, which facilitate the distribution of goods and services. The following are the important auxiliaries of trade and industry.

a. Advertising and Publicity
Advertisement and publicity let the customers know about the goods or services. It can draw their attention towards the products and thus promotes the trade dealing in the wider coverage.

b. Warehousing
It is a way of storage of goods, which protects them from losses, fire, theft etc. on one side and creates time utility on the other. Some goods are produced seasonally but demanded throughout the year. They should be stored so that they can be supplied when demanded. Thus, warehousing promotes trade activities by providing storage facilities for the goods.

c. Insurance
Insurance is a way of transferring business risks to an agency in consideration of the payment of a certain premium. There may be any sort of financial loss in production, storage, carriage etc. It is insurance, which assures the recovery of financial loss and promotes and develops trade activities.

d. Banking anil finance
Banks and financial institutions frequently provide capital in terms of loan under different terms and conditions. Banks also provide agency services like credit guarantee, remittance of money etc. to the business parties. In this way, banking service is an important auxiliary service to commerce.

e. Transportation
Trade is an act of distribution of goods from producers to ultimate consumers. It is transportation, which delivers the goods up to the various consumers from the manufacturers. Many carrier companies is private as well as public sectors are in operation for the transportation of the goods. It plays a significant assistance in promoting trade.

f. Communication
It is a process of transmission of information among persons and places. With the development of communication network, the world has become a small village. Most of the business communication is made through various means like correspondence, radio, television, telephone, fax, e-mail, internet etc. and most of the trade dealings are performed by way of such communication. Thus, communication is an important aid for trade and commerce.