NCERT Solutions Class 11 Business Studies Chapter 1 Nature and Purpose of Business

Multiple choice Questions

Q1. Which of the following does not characterise business activity?

• Production of goods and services
• Presence of risk
• Sale and exchange of goods and services
• Salary and wages

 Answer: d) Salary and wages - Salary and wages do not come under business activity. Business refers to an occupation in which people regularly engage in activities related to purchase, production and sale of goods or exchange of goods to satisfy the needs of other people. These people work for profit motive and do not work for salary or wages. Risk in also involved in any business activity.

Question 2. Which of the broad categories of industries covers oil refinery and sugar mills ?

• Primary
• Secondary
• Tertiary
• None of them.

Answer: b) Secondary 

Oil refinery and sugar mills are categorised as secondary industries as they are using the materials which have already been extracted at the primary stage, in this case, crude oil and sugarcane.

Q3. Which of the following cannot be classified as an auxiliary to trade?

• Mining 
• Insurance
• Warehousing
• Transport 

Answer : a) Mining

 Insurance, warehousing and transport are classified as auxiliaries to trade as these activities help in removing various hindrances which arise in connection with production and distribution of goods. Mining does not facilitate trade and is classified as primary industry.

Question 4.

The occupation in which people work for others and get remunerated in return is known as 

• Business 
• Employment
• Profession
• None of them

 Answer: b) Employment - Employment refers to the occupation in which people work for others and get remunerated in return. Those eengaged in business and profession work with the main motive of earning profit for themselves.

 

Question 5. The industries which provide support services to other industries are known as

• Primary industries
• Secondary industries
• Commercial industries
• Tertiary industries 

Answer: d) Tertiary industries - Tertiary industries provide support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities.  

Question 6 - Which of the following cannot be classified as an objective of business?

• Investment
• Productivity
• Innovation
• Profit earning 

Answer: a) Investment  - Increase in productivity, innovation, earning profit are the objectives of a business. Motive of every business is to earn profit. TO be able to compete in the market, business enterprises need to increase and improve productivity , engage themselves in Research and Development to be able to produce better products . Investment is not the objective of a business, rather it the basic requirement to run any business.

 Question 7 - Business risk is not likely to arise due to

• Changes in government policy
• Good management
• Employee dishonesty
• Power failure

 Answer: b) good management - Business risk may arise due to employee dishonesty, power failure, changes in government policy which might not be favourable to the business and bad management. Good management enables the business to achieve its objectives and hence does not bring business risk.

 

Short Answer Questions.

Question - State the different types of economic activities.

 There are three types of economic activities. They are:

Business: It refers to those economic activities, which are connected with the production or purchase and sale of gods or supply of services with the main object of earning profit

Prfession: It includes those activities which require special knowledge and skill to be applied by individuals in their occupation.. E.g – lawyers, doctors, chartered accountants etc.

 Employment: It refers to the occupation in which people work for others and get remunerated in return. e.g-agricultural labourers, industrial labourers.

 Question - Why is business considered an economic activity?

Business is considered to be an economic activity because it is undertaken with the object of earning money or livelihood and not because of love, affection, sympathy or any other sentimental reason.

Question - Explain the concept of 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. The term business is derived from the word ‘busy’ which means ‘engaged in an activity.

 Q4. How would you classify business activities?

 Business activities can be classified into industry and commerce.

Industry: It refers to economic activities which are connected with conversion of resources into useful goods. It is concerned with the production or processing of goods and materials. Industry is used for activities in which mechanical appliances and technical skills are involved. Example , cotton textile industry refers to all manufacturing units producing textile goods from cotton. Commerce: It includes two types of activities, viz.,i) trade and ii)auxiliaries to trade. Buying and selling of goods is termed as trade and activities required to facilitate the purchase and sale of goods are termed auxiliaries to trade and include banking, transport, insurance, communication, advertisement, packaging and warehousing.

 

Question - What are various types of industries?

 The various types of industries are :

Primary industries : These include all those activities which are connected with the extraction and production of natural resources and reproduction of and development of living organisms, plants etc

Scondary industries: These are concerned with using the materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. Example, mining of an iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry.

Tertiary industries: These are concerned with providing support services to primary and secondary industries as well as activities relating to trade.

Q6. Explain any two business activities which are auxiliaries to trade.

 Services which facilitate the purchase and sale of goods is called auxiliaries to trade and include transport, banking, insurance, communication, advertisement, packaging and warehousing. The following are the two business activities which are auxiliaries to trade –

 Transport and communication: 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.

 Warehousing: Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed. 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 should be made for storage of goods to prevent loss or damage.

 Question = What is the role of profit in business?

 In any business, one of the main motive is to earn profit. No business can survive for long without earning profit. Moreover, a part of the profit is also required to be re-invested in the business for growth prospects. That is why businessmen make all possible efforts to maximise profits, by increasing the volume of sales or reducing costs.

 Q8 hat is business risk? What is its nature?

 The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events.

The following are the characteristics of business risks:

 Business risks arise due to uncertainties – Natural calamities, change in demand and prices, changes in government policy, improvement in technology, etc are some of the examples of uncertainty which create risks for business because the outcome of these future events is not known in advance.

 Risk is an essential part of every business – The amount of risk may vary from business to business but no business can avoid risk. Risks can be minimised but cannot be eliminated.

 Profit is the reward for risk taking – Greater the risk involved in the business, higher is the chance of profit. An entrepreneur undertakes risks under the expectation of higher profit.

 

Long Answer Questions.

Q1. Explain the characteristics of business. Business refers to an occupation in which people regularly engage in activities related to purchase, production and /or sale of goods and services with the view to earning profits. The following are the main characteristics of business:

 An economic activity- Business is considered to be an economic activity because it is undertaken with the object of earning money or livelihood and not because of love, affection, sympathy or any other sentimental reason.

 Production and procurement of goods and services-Before goods are offered to people for consumption, these must be either produced or procured by business enterprises.

 Sale or exchange of goods and services-Directly or indirectly business involves transfer or exchange of goods and services for value. Goods produced not for sale but for personal consumption is not called a business activity.

 Dealings in goods and services on a regular basis-Business involves dealings of goods and services on regular basis. One single transactions of sale or purchase does not constitute business.

 Profit earning- Earning profit is one of the main purpose of business. No business can survive for long without earning profit. Moreover, a part of the profit is also required to be re-invested in the business for growth prospects. That is why businessmen make all possible efforts to maximise profits, by increasing the volume of sales or reducing costs.

 Uncertainty of returns- 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 to run its business with the objective of earning profit but it is not certain as to what amount of profit will be earned.

 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 certain factors like changes in consumer tastes and fashions, changes in methods of production, strike or lock out in the workplace, increased competititon in the market , fire, theft, accidents etc.

 

Question -  Compare business with profession and employment.

Comparison of business with profession and employment can be explained with the help of the chart as below-

 

Basis	Business	Profession	Employment
Mode of establishment	Depends on an entrepreneur’s decision	Obtaining membership of a professional body and certificate of practice	Receiving appointment letter and service agreement
Qualifications required	Formal qualifications not required	Professional qualifications and training essential	Qualifications and training as prescribed by employer required
Reward or return	Profit	Professional fee	Salary
Risk of loss	Greater degree of risk of loss	Some risk	No risk

 

Q Explain with examples the various types of industries.

 Answer

Industry may be broadly classified as:

 Primary Industries – These include activities concerned with extraction and production of natural resources; reproduction and development of living organisms, plants, etc. These industries may be further sub divided into extractive and genetic industries. Extractive industries draw out products from natural sources. Genetic industries engage in breeding plants and animals for their use in further reproduction

Scondary Industries – These are concerned with using the materials which have already been extracted at the primary stage. These industries process materials derived from the primary industries to produce goods for final consumption or for further processing by other industrial units. These may be further divided into manufacturing and construction industries. Manufacturing industries are engaged in producing goods through processing of raw materials. These are further sub divided into analytical, synthetical, processing and assembling industries. Construction industries are involved in the construction of buildings, dams, bridges, roads, etc. by using products of extractive and manufacturing industries.

 Tertiary Industries – These industries provide support services to primary and secondary industries as well as activities relating to trade. As business activities, these may be considered as a part of commerce since auxiliaries to trade assist in trade. These include: banking, warehousing, insurance, transportation, communication, packaging and advertising.

 

Question  - Describe the activities relating to commerce.

 Answers - Commerce provides the necessary link between producers and consumers. Commerce include two types of activities- trade and auxiliaries to trade. Buying and selling of goods is termed trade and activities that are required to facilitate the purchase and sale of goods is called auxiliaries to trade. It includes all those activities which involves the removal of hindrances in the process of exchange .

The various branches of auxiliaries to trade are:

a). Transport – It facilitates movement of raw materials to the place of production and finished products from factories to places of consumption. It creates ‘place utility’ and helps a producer to increase production and earn a remunerative price.

b). Banking – Funds are required for running business activities and to meet day to day expenses, which can be obtained from banks. Banks help in overcoming the problem of finance by providing loans, overdrafts or cash credit.

c). Warehousing – It refers to storage of goods. Goods have to be stored for some time before transportation by manufacturers, wholesalers and retailers. It creates ‘time utility’.

d). Advertising – It helps in providing information about the available goods & inducing customers to buy specific items. It persuades the potential customers by making them aware of a product’s availability, usage, quality, price etc.

e). Insurance - It provides security against various risks faced by a business. Assets of the business, stocks of raw materials, finished goods and employees are required to be protected from the risks. Hence, insurance makes trade and business secure by making provision against all probable losses.

 

Question = Why does business need multiple objective? Explain any five such objectives.

 Answers Since a business has to balance a number of needs and goals, it requires multiple objectives. Objectives have to be specific in every area and sphere of business.

Objectives define in concrete terms what the business s going to do. Objectives also enable the business to analyse their own performance and take steps to improve their performance in future.

The following are five multiple objectives that a business tries to achieve-

 Innovation- No business enterprise csn flourish in a competitive world without new ideas or innovation.Innovation is the introduction of new ideas or methods in the way something is done or made.

 Productivity- In order to ensure continuous survival and progress, every enterprise aims at greater productivity through the best use of available resources.Productivity is ascertained by comparing the value of output with the value of inputs.

 Earning profits – One of the objective of business is to earn profits on the capital employed. The profit earned can be re invested for better growth and survival.

 Market Standing – Market standing refers to the position of an enterprise in relation to its competitors. A business enterprise aims at standing on stronger footing in terms of offering competitive products to its customers and serving them better.

 Physical and financial resources- Business requires physical resources like plants , machines, offices etc. and financial resources to supply goods and services to its customers . A business enterprise aims at acquiring these resources according to their requirements and use them in a better way.

 Question .

 Explain the concept of business risk and its causes.

 Answer - The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. There are two types of risk – speculative and pure. Speculative risk involve both the possibility of gain as well as the possibility of loss. It arises due to changes in the market conditions including fluctuations in demand and supply, changes in prices or changes in fashion and tastes of customers. Pure risks involve only the possibility of loss or no loss.The chance of fire, theft, strike are examples of pure risks. Causes of business risks may be classified as follows:

Natural Causes: Human beings have no control over the nature. Unforeseen events like heavy rains, famine, earthquake etc. affects business adversely.

 Human causes: These include dishonesty, carelessness and negligence of employee, riots, strikes etc.

 Economic Causes: Economic causes relate to fluctuations in demand and price or changes in the market conditions. A business may incurr losses because of price fluctuations, severe competition, and depression in the market. For example, color T.V. has replaced Black and white T.V. from the market.

 Other Causes: These include all technical or mechanical causes, which affect the working of the business. For example an explosion in a boiler may cause injuries to human beings.

 Question - What factors are important to be considered while starting a business? Explain.

 Answer : Survival of the business largely depends upon the ability of the entrepreneurs to anticipate problems and solve them with minimum cost. Some of the basic factors which must be considered while starting a business are as follows –  

Selection of line of business- Nature and type of business to be undertaken to start a business is very important. This decision will be influenced by the customer requirement in the market, technical knowledge and interest of the entrepreneur.

 Size of the firm- Scale of operation or size of the firm is very important factor to be considered while starting a business.If the market conditions are uncertain and risks are high, small size business would be a better choice for the entrepreneur and vice versa.

 Choice of form of ownership- The choice of suitable form of ownership such as sole proprietorship, partnership, joint stock company will depend on such factors as line of business, capital requirements, liability of owners, division of profit, legal formalities, continuity of business, transfer of interest and so on.

 Location of business enterprise- It is very important to locate the place where the business will be located. Availability of raw materials and labour, power supply and services like banking, transportation, communication, warehousing etc are important factors to be considered while selecting a location.

 Financing the proposition- Availability of necessary capital is very important for starting as well as for continuing the business. Capital is required for investment in fixed assets like land and building, machinery and equipment and current assets like raw materials, book debts, stock of finished goods etc. For requirement of capital, its proper utilisation and determining the source of capital proper financial planning is required.

 Physical facilities- It is very important for an entrepreneur to consider and decide the physical requirement like machinery, equipment, building and supportive services etc. depending upon the nature and size of business, availability of funds and the process of production .

 Plant layout- After the physical requirement s are met, the entrepreneur should draw a layout plan showing arrangement of these facilities. Layout means the physical arrangement of machines and equipment needed to manufacture a product.

 Competent and committed worke force- It is very important for an entrepreneur to identify the requirement of skilled, unskilled workers and managerial staffs so that physical and financial resources are converted into desired outputs.

 Tax planning – The entrepreneur has to consider in advance the tax liability under various tax laws and its impact on business decisions so that the business is carried out efficiently and smoothly.

 Launching the enterprise- Actual launching of the business can take place once above factors have been taken into account. This would mean mobilising various resources , channelising them, fulfilling necessary legal formalities, starting the production , advertisement, sales promotion campaign.