CBSE NCERT Class XI (11th) | Business Studies

Chapter 1 - Nature and Purpose of Business


Q1 :  
Which of the following does not characterise a 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 :
Salary or wages is not a characteristic of business. In a business activity, the entrepreneurs work for themselves, solely for the profit motive. A business involves production and exchange of goods and services. Risk is also involved in carrying on a business because of the unpredictable events associated with it.
Hence, the correct answer is option (d).
Q2 :  
Which of the broad categories of industries covers oil refinery and sugar mills?
(a) Primary
(b) Secondary
(c) Tertiary
(d) None of them

Answer :
An oil refinery and a sugar factory are categorised as secondary industries as their raw materials (crude oil and sugarcane) are processed into finished goods (oil and sugar).
Hence, the correct answer is option (b).
Q3 :  
Which of the following cannot be classified as an auxiliary to trade?
(a) Mining
(b) Insurance
(c) Warehousing
(d) Transport

Answer :
Mining cannot be classified as an auxiliary to trade. This is because it does not facilitate trade but infact forms the basis of trade. Mining is classified as a primary industry as it involves the extraction of natural resources.
Hence, the correct answer is option (a).
Q4 :  
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 :
Employment is a business activity in which people are hired and are remunerated in return. Those engaged in a business or a profession work with the main motive of earning a profit for themselves.
Hence, the correct answer is option (b).
Q5 :  
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 :
Tertiary industries provide facilities to primary and secondary industries, such as transport and banking, to enable them to function.
Hence, the correct answer is option (d).

Short answerslong answersmultiple choice questions : Solutions of Questions on Page Number : 20
Q1 :  
State the different types of economic activities.

Answer :
The following are the different types of economic activities.
(a) Business: It basically involves trading of goods and services on a regular basis. The sole motive with which a business is conducted is profit.
(b) Profession: A profession is an occupation that requires highly specific and in-depth knowledge of the relevant field. Every profession is different from another in terms of the knowledge and skills required to practise it. For instance, a doctor cannot engage in the profession of an engineer.
(c) Employment: In this type of economic activity people are hired by organisations to work on a regular basis and are paid in exchange of their services. Normally, a monthly salary is paid. The payments are generally in monetary terms along with certain non-monetary compensations such as perks and other types of allowances. The remuneration paid to blue-collar employees (basically, workers) is termed 'wages', while the remuneration paid to white-collar employees (particularly, officers) is termed 'salary'. All the employees of an organisation work together for the achievement of the common goals.
Q2 :  
Explain the characteristics of business.

Answer :
Business refers to an economic activity that basically involves trading of goods and services on a regular basis. The sole motive with which a business is conducted is profit. The following are the main characteristics of business.
(a) As mentioned in the definition, business is considered to be an economic activity as it is run with the sole objective of earning a profit.
(b) Business involves procurement of raw materials and semi-finished goods and services, which are then processed further and thereafter sold to the final consumers at higher prices. It is because of this value addition that the prices of finished goods and services are higher.
(c) All types of business activities are conducted to pursue just one single motive, profit. It is the capacity to earn profits that decides the sustainability and future growth prospects of a business.
(d) Business basically involves an exchange of goods and services. The common medium of exchange is money.
(e) The exchange of goods and services (as mentioned in the point above) is done on aregular basis. Business is a continuous process in which semi-finished goods are procured, some value is added to them and the final goods are traded in the market. It should be noted that one single deal or transaction cannot be called a business.
(f) Every business, irrespective of its size (whether it is a large or a small business) and the types of goods produced, faces business risk. Although the degree of risk may differ from business to business, there is no way in which a business can escape risk. It is because of risks that no business can accurately anticipate the returns on investments.
(g) Besides the profit motive, a business aims at satisfying consumers' wants. A business must produce goods and services considering consumers' needs. If goods and services are produced only to fulfill the businessperson's own needs, then this activity cannot be considered a business as the goods and services are meant merely for self-consumption.
Q3 :  
Why is business considered an economic activity?

Answer :
Business is primarily undertaken with an objective to earn money to finance one's livelihood. It can be said that the sole motive with which a business is run is profit. That means, the decision to carry-out a business is not out of love or to perform charitable activities. Hence, business is considered an economic activity.
Q4 :  
Compare business with profession and employment.

Answer :
Business, profession and employment can be compared as shown in the chart below.

Basis of distinction
Business
Profession
Employment
1.
Commencement
A business can be started by an entrepreneur depending on his or her decision to do so and subject to the fulfillment of certain legal formalities.
A profession can be commenced only after the successful completion of a (professional) degree or a certificate course.
Employment commences when the appointment letter and the service agreement are signed by the employer and the employee.
2.
Investment
The amount of capital required depends on the size and nature of the business.
Limited capital investment is required.
Capital is not required.
3.
Risk involved
Profits are unpredictable. The degree of risk involved depends on the nature of the types of goods produced by a business and the scale of business operations.
A comparatively low degree of risk is involved.
Negligible risk involved.
4.
Transfer of ownership
Ownership can be transferred subject to the fulfillment of some legal formalities.
Ownership cannot be transferred as a professional has acquired the required degree and the skills only for himself or herself.
Ownership is not possible.
5.
Reward or remuneration
Profit earned
Professional fees
Salary
6.
Code of conduct
No code of conduct
As prescribed by the professional association concerned.
As per the terms and conditions laid down by the organisation concerned.
7.
Qualification
No minimum qualification is necessary.
Prescribed professional qualification is necessary.
Depends upon the nature of the job. For instance, for the blue-collar jobs, low educational qualifications are adequate, whereas higher qualifications are required for white-collar jobs.
Q5 :  
Explain the concept of business.

Answer :
The term 'business' has been derived from the word 'busy', which means 'engaged in an activity'. A person who is engaged in business trades goods or services for a profit, which is the sole motive of conducting business. In the pursuit of earning a profit, a businessperson aims to produce goods and services that is in demand. This is because it is economically prudent to produce such goods and services as they ensure higher profits. Thus, a business fulfils the need of the businessperson to earn a living while simultaneously fulfilling the needs of the consumers.
Q6 :  
Explain with examples the various types of industries.

Answer :
The following are the various types of industries.
(a) Primary industries: These industries basically undertake activities related to the extraction and processing of natural resources. These industries directly use natural resources as their raw materials and convert them into a consumable form. Agriculture, mining, fishing, etc., are among the activities undertaken by primary industries. Based on the nature of the activities performed, primary industries can be classified as 'extractive' or 'genetic' industries.
(i) Extractive industries: These industries deal with extraction and refinement of natural resources. The products of these industries serve as raw materials for other industries, which further process these products into useful goods. Agriculture, fisheries, mining, etc., are among the extractive industries.
(ii) Genetic industries: These are the industries that undertake breeding of plants and animals which can be used for further reproduction. Seeds and nursery industries and poultry farming are examples of genetic industries.
(b) Secondary industries: These industries, also known as manufacturing industries, acquire raw materials (i.e., the final products of primary industries) and convert them into final goods after further processing and value-addition. In other words, these industries aim at making the raw materials that they procure more readily consumable by the final consumer. Secondary industries can be further classified in the following manner.
(i) Manufacturing industries: These industries further process raw materials or semi-finished goods into finished products that can be readily used by the final consumer. On the basis of the method of production used by manufacturing industries, they can be further divided into four main categories.
1. Analytical industries: These industries analyse a single product (raw material) and then refine and separate different elements from it to prepare their final products. For example, an oil refinery is an analytical industry in which different products are segregated from crude oil as petroleum, wax, paraffin, etc.
2. Synthetic industries: Synthetic industries combine different raw materials (which serve as ingredients) to produce a completely new product. For instance, a cosmetic cream industry combines various ingredients such as calamine and perfume extracts to produce a final product.
3. Processing industries: In processing industries, the raw material is processed and refined in various stages and converted into the final product. Among the prominent examples of processing industries are the sugar and paper industries.
4. Assembling industries: These type of industries combine various smaller components to form a new final product. As against synthetic industries that combine different raw materials to prepare a new product, assembling industries combine parts that are final products in themselves to produce a new product. The electronics goods industry is an example of an assembling industry.
(ii) Construction industries: These industries are concerned with the construction and development of infrastructure such as buildings, bridges, dams and roads.
(c) Tertiary industries: These industries are regarded as a lifeline of an economy and act as the basic facilitators for the operation of primary and secondary industries. Among the major services provided by tertiary industries , a few are banking and credit facilities, communication and transportation. These industries are not engaged in hardcore production activities but are basically service providers.
Q7 :  
How would you classify business activities?

Answer :
Business activities can be classified into the following two broad categories.
(a) Industry: It refers to economic activities in which raw materials are processed and converted into final products. During the process, value addition to the raw materials takes place, and the final products have a higher value compared with the raw materials. For instance, a piece of cloth has a higher value than the cotton from which it is produced. Therefore, we can say that industries produce goods that are readily consumable by the final consumers. Among the major activities that are performed by an industry are production, processing and manufacturing. Industries are classified into the three categories—primary, secondary and tertiary.
(b) Commerce: Unlike industry, commerce does not involve manufacturing or production. It basically involves trading and its related activities. Commerce includes exchange of goods and services. It primarily aims at the circulation of these goods and services so as to keep them within the reach of the final consumers. The major commercial activities are transportation, advertisement, packaging, warehousing, banking, communication, etc. Hence, it can be said that commerce bridges the gap between the producers and the consumers. Trade can be further classified into two—internal and external trade.
Q8 :  
Describe the activities relating to commerce.

Answer :
Commerce includes two types of activities—trade and auxiliaries to trade. It mainly involves activities that bridge the gap between the producers and the sellers. Auxiliaries to trade are activities that facilitate the trading process.
The following are the various auxiliaries to trade.
(a) Banking and finance: Finance is the most important input to run any business. The absence of a banking and finance system can obstruct the free movement of goods. An efficient banking facility ensures the easy and ready availability of cheap credit to businessmen and traders, and thus acts as an auxiliary to trade.
(b) Advertising: It is through advertisements that businessmen are able to reach a large number of potential buyers. Advertisements through television, the Internet, newspapers, the radio and other various media educate the buyers and make them more aware of the goods available. This helps businessmen to increase their sales. Hence, advertisement plays the role of an auxiliary to trade.
(c) Warehousing- It refers to the holding or preservation of goods until they are transported for final consumption. It helps businesses to store goods and facilitates the availability of goods when required.
(d) Insurance: Every business activity involves various types of risks because of the existence of factors beyond control. Insurance acts as a protection against these risks. On payment of a nominal premium, the loss suffered by a business can be recovered from the insurance company concerned.
(eTransportation- It enables a producer to purchase raw materials and other inputs from various places and sell the final products in different regions. Transport facilitates the selling and buying of goods.
Q9 :  
What are the various types of industries?

Answer :
The following are the different types of industries.
(a) Primary industries: These industries basically undertake activities related to the extraction and processing of natural resources. These industries directly use natural resources as the raw materials and convert them into a consumable form. Agriculture, mining and fishing are some of the activities undertaken by primary industries. Based on the nature of the activities performed, primary industries can be classified into 'extractive' or 'genetic' industries.
(b) Secondary industries: These industries (also known as manufacturing industries) acquire raw materials (which are the final products of primary industries) and convert them into final goods after further processing and value addition. These industries aim at making raw materials more readily consumable by the final consumer.
(c) Tertiary industries: These industries are regarded as the lifeline of an economy and act as the basic facilitators for the operation of primary and secondary industries. Among the major services provided by the tertiary industries, a few are banking and credit facilities, communication and transportation. These industries are not engaged in hardcore production activities but are basically service providers.
Q10 :  
Why does business need multiple objectives? Explain any five such objectives.

Answer :
Although business is run solely to earn a profit, nowadays, with growing diversity, the objectives of business have expanded. It is no more limited to earning profits and have multiple objectives. The following are the multiple objectives that a business aims at achieving simultaneously.
(a) Innovation: It means developing new techniques by incorporating new ideas to meet new demands. It is a continuous and never-ending process. With the help of new techniques, a business can reduce its cost of production and provide new and superior products at a low price compared with competitors. Thus, innovation is of immense need if a business wants to attract new consumers and grow. In today's world, it has been realised that innovation is the only way by which a business can remain ahead of its competitors.
(b) Maximum profit: Profit has always been the sole motive of every business. It is quite rational for anyone who invests a certain amount of money in business to expect a higher amount in return. The profit-earning capacity of a business decides its growth prospects. The higher the profits, the higher is the amount reinvested in the business, and consequently, the higher are the growth prospects and vice versa.
(c) Market share: Usually, every business faces competition. Moreover, each business wants to stay ahead of its competitors. The only way to do this is to capture the maximum market share (i.e., by catering to the needs of a large number of consumers). A business with this objective must aim at providing products of superior quality to consumers at a comparatively low price.
(d) Workers' performances and their attitude: The productivity and profitability of a business are dependent on its workers' performances and their attitude. A motivated and satisfied worker contributes the maximum to the achievement of the goals of a business. Thus, every business must aim at creating a healthy environment that encourages its workers to make a positive contribution .
(e) Social responsibility: It has been realised that a business does have certain responsibilities towards society. These are termed social responsibilities. Business, as an integral part of society, must contribute to solving social problems such as poverty, lack of employment opportunities and environmental pollution. The fulfilment of these social objectives helps a business to earn a positive reputation—that is, goodwill.
Q11 :  
Explain any two business activities which are auxiliaries to trade.

Answer :
Auxiliaries to trade include trade-related activities which facilitate the exchange of goods and services. Among the major auxiliaries to trade, a few are transportation, advertisement, packaging, warehousing, banking and communication. The following are two business activities which are auxiliaries to trade.
(a) Banking and finance: Finance is the most important input to run any business. Purchasing raw materials and meeting day-to-day expenses demand finance. Besides the availability of the right amount of funds, their easy and cheap availability is also equally important. In today's world, where a majority of trading activities are conducted on credit, the need for finance is immense. This is because, as goods are sold on credit, the funds that are invested are not realised until the sale proceeds are ultimately received by the producer or the trader. Thus, the absence of a banking and finance system can obstruct the free movement of goods. In these contexts, an efficient banking facility ensures the easy and ready availability of cheap credit to businessmen and traders, and thus acts as an auxiliary to trade.
(b) Advertising: We all know the importance of advertisement in today's world. It is through advertisements that businesspersons are able to reach a large number of potential buyers. Advertisements through television, the Internet, newspapers, the radio and various other media educate the buyers and make them more aware of the goods on sale. Advertising helps businesspersons to increase their sales and hence plays the role of an auxiliary to trade.
Q12 :  
Explain the concept of business risk and its causes.

Answer :
Business risk is the possibility of a business failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond its control. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand. the businessperson would earn lower profits.
There are two types of business risks, namely, speculative business risk and pure business risk.
(a) Speculative business risk refers to an equal chance of earning gains or incurring losses. It arises because of changes in the external forces, such as changes in the competitor's policies, changes in government policies, price change, and changes in consumer preferences.
(b) Pure business risk refers to the chance of either incurring only losses or incurring no loss at all. Examples of pure business risk are the risk associated with theft, fire and various natural calamities.
Causes of Business Risk
The following are the various causes of business risk.
(a) Natural causes: Unforeseen natural calamities such as earthquake, flood and famine cause heavy and irreplaceable losses to a business. The business risk that comes from natural factors is beyond the control of businesses.
(b) Economic causes: These causes are related to the uncertainties associated with changes in competitors' policies, price change and change in consumer preferences.
(c) Human causes: These causes are related to the actions of human beings. Among the human causes of business risk are carelessness, strikes and riots.
(d) Other causes: Besides the causes mentioned above, there are a few unpredictable events that cause business risk—for example, political disturbances, exchange-rate and interest-rate fluctuations and budget amendments.
Q13 :  
Which of the following cannot be classified as an objective of business?
(a) Investment

(b) Productivity
(c) Innovation
(d) Profit earning

Answer :
Investment is not an objective of business. Rather, it is a basic requirement of every business. It is the profit motive that serves as the sole objective of every business activity. Business enterprises also need to improve their productivity and engage in research and development activities for innovating new products to be able to sustain themselves in the market. Thus, increasing productivity, innovating and earning a profit are objectives of business. However, investment cannot be considered as a business objective.
Hence, the correct answer is option (a).
Q14 :  
What is the role of profit in business?

Answer :
Earning a profit is the sole motive of any business activity. It is not possible for a business to sustain itself for a long time if it does not earn sufficient profits. This is because, for a business to continue, a part of profit has to be reinvested in the business. Reinvestment also ensures the growth prospects of a business and enhances its future profit-earning capacity. Profits are regarded as the reward for undertaking the risks associated with a business. If a business is not earning profits, then it is considered a non-viable venture.
Q15 :  
What factors are important to be considered while starting a business? Explain.

Answer :
Before starting a new business venture, an entrepreneur must carefully consider various aspects. He or she must evaluate each aspect, considering the various positive and negative consequences. The following are some of the important factors that must be considered while starting a business.
(a) Selecting the line of business: The line of business is the foremost decision that involves choosing the kind of product to produce, analysing its existing and future market demand, profit considerations and the level of technical knowhow possessed by the entrepreneur.
(b) Scale of the business: Once the line of business is selected, the entrepreneur needs to decide the scale of the business, i.e., the business size, whether to operate on large scale or small scale. The choice of scale of business is made on the degree of risk embedded in
(i) the line of business
(ii) the ease of obtaining capital and
(iii) the projected demand for the product
A larger scale of business is preferred if the risk involved is low and the entrepreneur is confident about the high demand for the product. Similarly, the greater the ease of obtaining capital, the greater is the ease of operating a business on a large scale and vice versa.
(c) Location: The choice of business location is dependent on numerous factors such as easy and cheap availability of raw material and labour, well-connected transportation facilities, and power and other infrastructural facilities. Generally, locations where good infrastructure is available are preferred.
(d) Financial requirement: Finance is required for every aspect of business—from the purchase of raw material and machinery to further investment for the growth of the business. Therefore, while starting a business, the availability of alternatives to raise funds must be carefully analysed.
(e) Efficient workforce: A competent and trained workforce is the basic input to carry on various business activities. In this regard, the entrepreneur must appropriately identify the requirement of human resources for the business, both at the worker level and at the managerial level.
(f) Physical requirements: These requirements include machinery, other equipment, tools and technology that add to the efficiency of a business. The entrepreneur must carefully consider and decide the physical requirements on the basis of the nature and production scale of the business.
Q16 :  
Business risk is not likely to arise due to
(a) Changes in government policy

(b) Good management
(c) Employee dishonesty
(d) Power failure

Answer :

Good management enables an enterprise to achieve new milestones and does not bring on a business risk. Changes in government policy, dishonesty on the part of employees and power failure can lead to losses and thus are considered business risks.
Hence, the correct answer is option (b).
Q17 :  
What is business risk? What is its nature?

Answer :
Business risk is the possibility of failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond the control of a business. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand, the businessperson would earn lower profits.
Nature of Business Risk
(a) Risk is part and parcel of business: Risk is an essential feature of a business. Every business, irrespective of its size and nature, whether organised or unorganised, faces risk.
(b) Varying degree- The extent of risk that a business faces depends upon the nature or type of goods produced and the scale of operation. A business that produces goods of daily use, such as soap and toothpaste, faces a lower business risk than a business that produces goods which are highly dependent on consumer preferences, such as cell phones. Similarly, a business operating on a large scale (i.e., a large business firm) faces a higher business risk compared to a small-scale business.
(c) Directly related with profit- We know that profit is the reward for undertaking business risk. The higher the degree of risk involved, the higher would be the amount of profit earned and vice versa.

(d) Results due to unforeseen circumstances: Risks emerge because of unforeseen circumstances and uncertainties. Unforeseen circumstances may include strikes and thefts (termed 'human uncertainties') or business uncertainties—such as price change, changes in government policies and natural disasters, such as earthquake and floods.

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