CH- 1 EVOLUTION AND FUNDAMENTALS OF

BUSINESS/BUSINESS,TRADE AND COMMERCE

Difference between Business, Profession and Employment

Basis Business Profession Employment

Mode of Entrepreneur‘s Membership of a Service contract

Establishment decision with required professional body and letter of
legal formalities and certificate of appointment.
practice.

Nature of Supply of goods and Personal services of Work assigned

Work services expert nature. by the
employer.

Qualification No minimum Minimum Depends upon

qualification required educational the type
qualification and of job.
training is required

Basic Motive Profit making Providing services Earning wages or

salaries

Capital Capital Investment is Small amount of No capital

Investment required depending Investment is required investment is
upon size and nature to set up an office. Required
of business.

Reward Profits Fees Wages or salaries

Risk Inherent Very little No risk or

negligible risk.

Transfer of Ownership can be Cannot be transferred Now transferrable

Interest transferred as per the
law

Code of No code of conduct. Professional code of Terms and

Conduct conduct conditions of
the employer have
to be followed.
 Business activities are broadly classified into two categories:
(i) Industry
(ii) Commerce

Transport
Warehousing Banking
Insuranc
Primary Industry
All business activities which are concerned with the extraction of natural resources and
breeding of plants and animals are known as primary industries. These include the following:

(i) Extractive Industries: These industries are engaged in extraction of useful materials from beneath the
surface of the earth and sea means natural resources. In these industries, the products, gifted by nature, are
extracted and collected for the benefit of human beings e.g. Mining, Quarrying, Fishing, Forestation etc.

(ii) Genetic Industries: These are engaged in breeding plants & animals for their use in further reproduction
e.g. Nurseries, Cattle breeding, Poultry farms, Dairy farming etc.
Secondary Industry
These industries process materials, which have been already extracted from the primary industries, to
produce goods for final consumption or for further processing by other industrial units. E.g. mining of iron
ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a
secondary industry. The secondary industries are further subdivided as follows:

(i) Manufacturing Industries: These are concerned with the processing or transformation of raw materials
& semi-finished goods (half made goods) into finished products. These industries are engaged in producing
goods through processing of raw materials and, thus, creating form utilities. Manufacturing industries are
of following types:
a. Analytical Industries: Under it, a basic raw material is broken into general useful materials. E.g.: In an oil
refinery, the crude oil is analyzed and separated into several products such as petrol, diesel, Kerosene and
lubricating oil.
b. Synthetical Industries: Under it, two or more materials are combined to form a new product. E.g.:
Concrete, gypsum, coal are mixed to produce cement.
c. Processing Industry: Under it, a raw material is processed through various steps to make the final
product. E.g.: In the cotton textile industry, cotton passes through spinning, weaving, dyeing, and bleaching,
the printing process to convert it into cloth. Other examples are making of cheese, jams etc.
d. Assembling Industry: Under this, manufactured components/parts are combined together mechanically
or chemically to produce a new product. E.g.: Manufacture of TV sets, computers, automobile industry etc.

(ii) Construction Industry: This Industry is engaged in the construction of buildings, roads, bridges etc. They
utilize the products of manufacturing industries like cement, steel, iron, and bricks.

Tertiary Industries
These are concerned with providing support services to primary and secondary industries as well as
activities relating to trade. As business activities, these may be considered part of commerce because as
auxiliaries to trade these activities assist trade. Included in this category are transport, banking, insurance,
warehousing, communication, packaging and advertising.

Commerce
Commerce includes all those activities, which are necessary for movement of goods from producer to
consumers. So it includes buying, selling and distribution of commodities.
Commerce is divided into two categories i.e. Trade and Auxiliaries to Trade.

Trade
It means buying and selling or exchange of goods and services. Trade removes hindrance of person by
bringing the producers and consumers together. Trade is further divided into two categories:

(i) Home Trade or Internal Trade: It is the buying and selling of goods within the geographical boundaries of
a country. It is also known as domestic trade. It includes wholesale trade and retail trade.

(ii) Foreign Trade or International Trade or External Trade: It is the buying and selling of goods or services
beyond the geographical boundaries of a nation. Foreign Trade is of the following types:
a. Import Trade: It is the buying of goods from a foreign country.
b. Export Trade: It is the selling of goods to a foreign country.
c. Entrepot Trade: It is the buying of goods from one country not for consumption in the home country but
for exporting it to another country.

Auxiliaries to Trade (Aids to Trade)

Activities which are meant for assisting trade and industry are known as auxiliaries to trade. These
are the activities which help in the buying and selling of goods (i.e. trade). Commerce helps in
removing various hindrances (obstacles). Auxiliaries to trade includes following services:

(i) Transportation: Transportation facilitates movement of goods from one place (place of manufacturing)
to another place (place of consumption) provides place utility to the product.
Production of goods takes place at a particular place whereas the consumers are scattered in different
places. Commerce removes this hindrance through transport.

(ii) Warehousing: Generally there is a time gap between production and consumption. As such, it becomes
necessary to store the goods until they are sold.
This hindrance of time gap between production and consumption is removed by warehousing. Thus
warehousing creates the time utility.
This also helps to balance the demand and supply thereby leading to price stabilization.

(iii) Insurance: Risk is inherent in every business. During transit or storage, goods may be damaged due to
natural calamities, theft, mishandling, fire etc.
Insurance removes the hindrance of risk in return for the payment of small premium. Thus, it creates risk
utility.

(iv) Banking & Finance: Finance is the life blood of the business. Without finance, there will be no business.
Banking removes the hindrance of finance, by making available the adequate amount of finance wherever
required. Thus it creates the finance utility.
Also convenient and safe means of payment are required to settle the business transaction. Banks remove
the obstacle in the process of exchange by making and collecting payment on behalf of their clients.
Therefore, Banking removes the hindrance of exchange.

(v) Advertising: A producer often finds it difficult to sell his goods and services because the consumers are
not aware of the benefits and usage of their goods and services. Advertising removes the hindrance of
knowledge by informing the customers about the goods and services. Thus it creates the utility of
knowledge.
Importance of profits
Profit is not an objective but a requirement of business. A business must earn profit because of the
following reasons.
(i) Survival
(ii) Growth
(iii) Symbol of efficiency
(iv) Reward for risk bearing
(v) Improves goodwill.
Profit can no more be the objective of business than eating is the objective of living. Profit earning is
essential for the survival and growth of business enterprises. Maximization of profit is not desirable
because it leads to exploitation. Maximization of profit is opposed because of the following reasons:

(i) It leads to exploitation of workers and consumers. For the sake of more profit, the businessman may
exploit the worker by paying less and may exploit the consumers by providing them less quality
products. (ii) It leads to a state of social inequalities where the rich become richer and the poor become
poorer.
(iii) It leads to a number of corrupt practices.
(iv) It lowers the human values because the state of increased profit will lead to a materialistic society.

Business Risks
The term business risk refers to the possibility of inadequate profits or even losses due to some
uncertainties or unexpected events. For example, demand for a particular product may decline due to
change in tastes and preferences of consumers or due to increased competition from other producers.
Lower demand results in long sales and profits.

Speculative Risks
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. Favorable market conditions are likely to result in
gains, whereas unfavorable ones may result in losses.
Pure Risks
Pure risks involve only the possibility of loss or no loss. The chance of fire, theft or strike is an example of
pure risks. Their occurrence may result in loss, whereas non-occurrence may explain absence of loss,
instead of gain.

Nature of Business Risks

(i) Business risks arise due to uncertainties: Business environment is totally dynamic and anything can
happen in future like change in government policy, change in price level, demand, natural calamities, etc.
Risk arises due to these uncertainties.

(ii) Risk is an essential part of every business: Risk is inherent in every business as business is prone to
various uncertainties. Risk can be minimized through various ways like insurance but can‘t be eliminated
altogether.
Degree of risk depends mainly upon the nature and size of business: Business which is run on a large scale
has higher risk as compared to a small scale business.
It also depends on the nature of business like IT business and Fashion industry have greater risk factors
due to rapid changes taking place.

(iii) Profit is the reward for taking the risk: The motive to earn higher profit makes business men take
risk. Thus, profit is the reward for taking risks. The higher the risk, the higher the chances of making
higher profit. So, the concept ―No risk, No gain is applicable to all business organizations.

Causes of Business Risk:

(i) Natural Calamities: These include risk due to flood, earthquake, heavy rain, drought etc. which are
beyond the control of human beings.

(ii) Human Causes: These include theft, carelessness of employees, strike, embezzlement of funds, riots etc.

(iii) Economic Causes: It includes fluctuation in demand and prices, change in exchange rate, change in
competition etc.

(iv) Physical causes: It includes mechanical defects like explosion in a boiler etc.

(v) Other Causes: It includes unforeseen events like political disturbances, change in technology etc.

Different ways of dealing with business risks are:

(i) Decide not to enter into too risky a transaction.
(ii) Take preventive measures, like fire fighting devices, to reduce risk.
(iii) Take an insurance policy to transfer risk to the insurance company.
(iv) Assume risk by making provisions in the current earnings as is the case of provision for bad and doubtful
debts; or
(v) Share risks with other enterprises as manufacturers and wholesalers may do by agreeing to share losses
which may be caused by falling prices
(vi) Transfer of risks