Chapter 1

Business, Trade and Commerce

Nature and Concept of Business

● The term business is derived from the word busy.

● Economic activities are those by which we can earn our livelihood, whereas, non-
economic activities are performed out of love, sympathy, sentiment. patriotism, etc.

● 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.

Characteristics of Business Activities

1. An Economic Activity

Business is considered to be an economic activity because it is undertaken with the objective

of earning money or livelihood and not out of love, affection, sympathy or any other emotion.

2. Production or procurement of goods and services:

Every business enterprise either manufactures the goods it deals in or acquires them from
producers, to be further sold to consumers or users. Goods may consist of consumable items
of daily use or capital goods.

3. Sale or exchange of goods and services:

Directly or indirectly, business involves transfer or exchange of goods and services for value.
If goods are produced not for the purpose of sale but for personal consumption, it cannot be
called a business activity.

4. Dealings in goods and services on a regular basis:

Business involves dealings in goods or services on a regular basis. One single transaction of
sale or purchase, therefore, does not constitute business.
 5. Profit earning:

No business can survive for long without profit. That is why. businessmen make all possible
efforts to maximise profits, by increasing the volume of sales or reducing costs.

6. 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 money (capital) to run its activities with the objective of earning
profit. But it is not certain as to what amount of profit will be earned.
● There is always a possibility of losses being incurred, despite the best efforts put into
the business.

7. Element of risk:

● Risk is the uncertainty associated with an exposure to loss. It is caused by some

unfavourable or undesirable event.
● Risks are related with factors, like changes in consumer taste and fashion, changes in
method of production, strike or lockout at workplace, increased competition in market,
fire, theft, accidents, natural calamities, etc.
● No business can altogether do away with risks.
Classification of Business Activities

● 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.
● Commerce includes all those activities, which are necessary for facilitating the
exchange of goods and services.

Industry

● Industry refers to economic activities, which are connected with conversion of

resources into useful goods.
● Generally, the term industry is used for activities in which mechanical appliances and
technical skills are involved
● These include activities relating to producing or processing of goods, as well as,
breeding and raising of animals. The term industry is also used to mean groups of firms
producing similar or related goods.

1. Primary industries:

These include all those activities which are concerned with the extraction and production of
natural resources and reproduction and development of living organisms, plants, etc.
These are divided as follows:

(a) Extractive industries:

● These industries extract or draw products from natural sources.

● Products of these Industries are usually transformed into many other useful goods by
manufacturing industries.
● Important extractive industries include farming, mining, lumbering, hunting and fishing
operations.

(b) Genetic Industries:

● These industries are engaged in breeding plants and animals for their use in further
reproduction.
● Seeds and nursery companies are typical examples of genetic industries.
● In addition, activities of cattle breeding farms, poultry farms, and fish hatchery come
under genetic industries.
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under genetic industries.

. Secondary industries:

● These industries process materials extracted from the primary state to produce goods
for final consumption or for further processing by other industrial units.
● For example, mining of iron ore is a primary industry, but manufacturing of steel by way
of further processing of raw irons is a secondary industry.
● Secondary industries may be further divided as follows:

(a) Manufacturing Industries: ASAP

● These industries are engaged in producing goods through processing of raw materials
and. thus, creating form utilities.
● They bring out diverse fnished products, that we consume, or use through the
conversion of raw materials or partly finished materials in their manufacturing
operations.
● 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. as in the case of oil refinery.
– Synthetical industry which combines various ingredients into a new product, as in the
case of cement.
– Processing industry which involves successive stages for manfucturing finished
products. as in the case of sugar and paper.
– Assembling industry which assembles different component parts to make a new
product, as in the case of television, car, computer. etc.

(b) Construction industries:

● These industries are involved in the construction of buildings, dams. bridges, roads as
well as tunnels and canals.
● Engineering and architectural skills are an important part in construction industries.

. Tertiary industries: IC TB APW

● These are concerned with providing suppor services to primary and secondary
industries as well as activities relating to trade.
● These industries provide service facilities. As business activities, these may be
considered part of commerce because as auxiliaries to trade these activities assist
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considered part of commerce because as auxiliaries to trade these activities assist
trade.
● Included in this category are Insurance, Communication, Transport, banking,
advertising, packaging and warehousing.

Commerce

● Commerce includes two types of activities, viz., (i) trade and (ii) auxiliaries to trade.
Buying and selling of goods is termed as trade.
● There are a lot of activities that are required to facilitate the purchase and sale of
goods. These are called services or auxiliaries to trade and include Insurance,
Communication, Transport, Banking, Advertisement, Packaging and Warehousing.
● Commerce provides the necessary link between producers and consumers. It
embraces all those activities, which are necessary for maintaining a free flow of goods
and services.
● Thus, all activities involving the removal of hindrances in the process of exchange are
included in commerce.

Remove Hinderance Hinderance

Trade Persons
Transport Place
Storage & Warehousing Time
Banking Capital
Insurance Risk
Advertisement Information

How?

Trade- By making goods available to consumers from the possession or ownership

producers.

Transport - By moving goods from the place of production to the markets for sale.
Storage & Warehousing- By facilitating holding of stocks of goods to be sold as and when
required.

Banking- Capital required to undertake the above activities is provided by banking and
financing institutions.

Insurance- Protection against risks is provided by insurance of goods.

Advertisement- Makes it possible for producers and traders to inform consumers about the
goods and services available in the market.

Trade

● 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 the consumers or users.
● These days goods are produced on a large scale and it is difficult for producers to
themselves reach out to individual buyers for selling their products.
● In the absence of trade, it would not be possible to undertake production activities on a
large scale.

Trade may be classied into two broad categories - internal an external

● Internal, domestic or home trade is concerned with the buying and selling of goods and
service within the geographical boundaries of a country.
● This may further be divided into wholesale and retail trade.
● When goods are purchased and sold in comparatively smaller quantities, for final
consumption it is referred to as retail trade.

● External or foreign trade consists of the exchange of goods and services between
persons or organisations operating in two of more countries.
● If goods are purchased from another country, it is called import trade. If they are sold
to other countries, it is known as export trade.
● When goods are imported for export to other countries, it is known as entrepot trade.

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
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facilitating the activities relating to industry and trade
● Auxiliaries are an integral part of commerce in particular and business activity in
general. These activities help in removing various hindrances which arise in connection
with the production and distribution of goods.

. Transport and Communication:

● Production of goods generally takes place in particular locations.

● But these goods are required for consumption in different parts of the country the
obstacle of place is removed by transport through road, rail or coastal shipping.
● Transport facilitates movement of raw material, to the place of production and the
finished products from factories to the place of consumption. There is also a need for
communication facilities so that producers, traders and consumers may exchange
information with one another.
● Thus, postal services and telephone facilities may also be regarded as auxiliaries to
business activities.

. Banking and Finance:

● Business activities cannot be undertaken unless funds are available for acquiring
assets, purchasing raw materials and meeting other expenses.
● Necessary funds can be obtained by businessmen from a bank.
● Thus, banking helps business n activities to overcome the problem of finance.
● Commercial banks. generally lend money by providing overdraft and cash credit
facilities, loans and advances.
● In foreign trade, commercial banks help exporters in collecting money from importers.
Commercial banks also help promoters of companies to raise capital from the public.

. Insurance:

● Business involves various types of risks. Buildings, machinery, furniture, etc.. must be
protected against fire, theft and other risks.
● Material and goods held in stock or in transit are subject to the risk of loss or damage.
● Employees are also required to be protected against the risks of accident and
occupational hazards.
● Insurance provides protection in all such cases.
● On payment of a nominal premium, the amount of loss or damage and compensation
for injury, if any, can be recovered from the insurance company.
 . Warehousing:

● Usually, goods are not sold or consumed immediately after production.

● They are held in stock to make them available as and when required.
● Special arrangement must be made for the 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.
● Prices are, thereby, maintained at a reasonable level through continuous supply of
goods.

. Advertising:

● Advertising is one of the most important methods of promoting the sale of products,
particularly, consumer goods.
● Most of these goods are manufactured and supplied in the market by numerous firms -
big or small.
● It is practically impossible for producers and traders to contact each and every
customer.
● Thus, for promoting sales, information about the goods and services available must
reach potential buyers.
● Advertising helps in providing information about available goods and services and
persuading customers to buy particular items.

Objectives of Business

● Profit is found to be the leading objective but not the only one.
● Although earning profit cannot be the only objective of business, its importance cannot
be ignored.
● Ever business is an attempt to reap more than what has been invested, and profit is the
excess of revenue over cost.
● Profit may be regarded as an essential objective of business for various reasons:

(I) It is a source of income fo business persons,

(ii) It can be a source of finance for meeting expansion requirements of business.
(iii) It indicates the efficient working of the business.
(iv) It can be taken as the society's approval of the utility of business.
(v) It builds the reputation of a business enterprise.
However, too much emphasis on profit to the exclusion of other objectives can be dangerous
for good business.

● Obsessed with profit, business managers may neglect all other responsibilities
towards customers, employees, investors and society at large.
● They may even be inclined to exploit various sections of society to earn immediate
proft. This may result in the non-cooperation or even opposition from the affected
people against the malpractices of business enterprises.
● The enterprises might lose business and may be unable to earn profit.
● That is the reason why there is hardly any sizable business enterprise who only
objective is maximisation of profit.

Multiple Objectives of Business

. 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 serving them to their satisfaction.

. Innovation:

● Innovation is the introduction of new ideas or methods in the way something is done or
made.
● There are two kinds of innovation in every business i.e.. (i) innovation in product or
services: and (ii) innovation in various skills and activities needed to supply products
and services.
● No business enterprise can flourish in a competitive world without innovation.
Therefore, innovation becomes an important objective.

. Productivity:

● Productivity is ascertained by comparing the value of output with the value of inputs.
● It is used as a measure of efficiency.
● In order to ensure continuous survival and progress every enterprise must aim at
greater productivity through the best use of available resources.

. Physical and financial resources:

● Any business requires physical resources and financial resources to be able to produce
and supply goods and services to its customers.
 ● The business enterprise must aim at acquiring these resources according to their
requirements and use them efficiently.

. Earning profits:

● One of the objectives of business is to earn profits on the capital employed.

● Profitability refers to profit in relation to capital investment.
● Every business must earn a reasonable profit which is so important for its survival and
growth.

. Manager performance and development:

● Business enterprises need managers to conduct and coordinate business activity.

● Various programs for motivating managers need to be implemented.
● Manager performance and development, therefore, is an important objective.
● The enterprises must actively work for this purpose.

. Worker performance and attitude:

● Workers' performance and attitudes determine their contribution towards productivity

and profitability of any enterprise.
● Therefore, every enterprise must aim at improving its workers performance.
● It should also try to ensure a positive attitude on the part of workers.

. Social responsibility:

● Social responsibility refers to the obligation of business firms to contribute resources

for solving social problems and work in a socially desirable manner.
● Thus, a business enterprise must have multiple objectives to satisfy different
individuals and groups.
● This is essential for its own survival and prosperity.

Business Risks- SLEPT ( Social, Legal, Economic, Political, Technological )

● The term business risks refers to the possibility of inadequate profits or even losses
due to uncertainties or unexpected events.
● Business enterprises constantly face two types of risk: 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, including fluctuations in
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demand and supply, changes in prices or changes in fashion and tastes of customers.
● Favorable market conditions are likely to result in gains. whereas, unfavourable ones
may result in losses.
● Pure risks involve only the possibility of loss or no loss. The chance of fire. theft or
strike are examples of pure risks. Their occurrence may result in loss, whereas, non-
occurrence may explain ábsence of loss, instead of gain.

Nature of Business Risks

. Business risks arise due to uncertainties:

● Uncertainty refers to the lack of knowledge about what is going to happen in future.
● Natural calamities, change in demand and prices, changes in government policies and
prices, improvement in technology, etc.

. Risk is an essential part of every business:

● Every business has some risk.

● No business can avoid risk, although the amount of risk may vary from business to
business.
● Risk can be minimised, but cannot be eliminated.

. Degree of risk depends mainly upon the nature and size of business:

● Nature of business and size of business are the main factors which determine the
amount of risk in a business.
● For example, a business dealing in fashionable items has a high degree of risk.
● Similarly, a large-scale business generally has a higher risk than what a small scale
has.

. Profit is the reward for risk taking:

● 'No risk, no gain' is an age-old principle which applies to all types of business.
● Greater the risk involved in a business, higher is the chance of profit.
● An entrepreneur undertakes risks under the expectation of higher profit. Profit is thus
the reward for risk taking.
Cause of Business Risks

. Natural causes:

Human beings have little control over natural calamities, like flood, earthquake, lightning,
heavy rains, famine, etc. property and income in business.

. Human causes:

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

. Economic causes:

● These include uncertainties relating to 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 for borrowing. levy of higher taxes, etc..
also come under these type of causes as they result in higher unexpected cost of
operation or business.

. Other causes:

These are unforeseen events, like political disturbances, mechanical failures, such as the
bursting of boiler, fluctuations in exchange rates, etc. which lead to the possibility of
business risks.