Chapter 1

Introduction of Commerce and Business

1.1 INTRODUCTION All human beings require different types of
goods and services to satisfy their needs. Human activities can
be classified as economic and non-economic activities.

Human
Activities

Non Economic
Economic Activities
Activities

Employment
Business Profession

Non-Economic Activities Non-economic activities are those

human activities which are performed to satisfy personal,
social, religious, cultural and sentimental requirement without
monetary expectations. For e.g. reading books, serving people,
cooking by mother etc.
Economic Activities Activities that involve production,
distribution and consumption of goods and services for money
or money’s worth at all levels within a society is called
economic activity. For e.g. worker working in a factory.
Thus, economic activities facilitate earning livelihood.
Business : Business is a part of economic activity. It is done
with the main aim of earning profits. It is a systematic attempt
by business persons to produce goods and services and sell
them in the market, to reap the reward by way of profit. It
satisfies multiple and complex needs of the society.
Definition of Business
Prof. Pride, Hughes and Kapoor - “The organized efforts of individuals to produce and sell for
a profit, the goods and services that satisfy society’s needs.

Characteristics / Features of Business

1. An Economic Activity : Business is an economic activity as it
is undertaken to earn money or livelihood. It is not because
of love, affection, feelings, sentiment etc.
2. Two Parties : Every business transaction involves an
exchange. Minimum two parties are required for exchange
i.e. the seller and the buyer.
3. Profit Motive : The basic purpose of business is to earn the
profit from its activities. Businessmen try to maximize profits
either by increasing the volume of sales or reducing its costs.
4. Production of Goods and Services : Before exchanging the
goods and services, they should be produced by business
enterprises. Goods are either manufactured or procured
from the supplier, with the aim of selling it further to the
consumers for profit.
5. Exchange of Goods and Services : Business involves transfer
of goods and services directly or indirectly with money or
money’s worth. Monetary exchange is the exchange with
money e.g. buying notebook for cash.
6. Dealings in Goods and Services : Every type of business
transaction is concerned with either goods or services. These
goods are consumer goods or capital goods. However,
 services created for business purpose are intangible which
are essential for doing the business e.g. transportation,
banking, insurance etc.
7. Continuity in Dealings : Every business requires regularity in
transactions. One single transaction does not constitute
business e.g. If a person sells his own motor car and earns
profit then it will not be considered as business activity. But
if he is a car dealer so he sells and purchases cars regularly
then, it is considered as business activity.
8. Uncertain Returns: In business, the returns are never
predictable or guaranteed. Businessman may earn profit or
suffer a loss.
9. Element of Risk : Risk is the key element of every business
which is concerned with exposure to loss. Every business
will have some or the other risk. Certain factors are beyond
the control of businessmen like changes in consumer tastes,
likes-dislikes, fashions, natural calamities etc.
10. Customer Satisfaction : Customer satisfaction is the
ultimate aim of all economic activities. It is done by providing
quality products and services at a reasonable price. The
purpose of the business is to create and retain the
customers.

Profession Profession is that part of economic activities

under which a person uses his educational knowledge and
special skill to render services for earning some income. e.g.
Doctor, Lawyer, Chartered Accountant etc.
Features of Business:
1. Aim : Every profession is practiced for earning money.
Also they render services to their clients and solve their
problems.
2. Qualification : A profession can be practiced only after
acquiring required qualifications. Each profession has a
certain set of body of knowledge. This knowledge has to
be acquired only by systematic and formal training. One
cannot practice profession, unless this knowledge is
acquired.
3. Financial Returns : Professionals get fees in exchange of
their services. Income received by professional is not
fixed. A working Chartered Accountant gets salary but
those who practice privately i.e. self-employed get fees.
4. Capital : Profession can be practiced independently or
professionals accept a job in any organization.
Independent practicing professional requires huge capital
for setting his practice. It differs from profession to
profession.
5. Registration and Membership : Some professions have a
council which regulates the activities of professionals.
These professionals have to register themselves with their
respective council and get certificate of practice e.g. Bar
Council of India for lawyers, ICAI for Chartered
Accountants, Indian Medical Association for doctors etc.
6. Non transferability : Profession can not be transferred to
other person on the will of professional. e.g. A doctor
cannot transfer his medical practice to his son or daughter
who has not completed concerned medical education.
7. Nature of Work : Professionals charge fees in exchange of
expert services e.g. an architect designs the layout of
office for fees.
Employment: It is an economic activity in which people work for
others. There is employer-employee relationship. Employer is the
person who offers the job and the person who accepts the job is
called employee. Remuneration and terms and conditions are agreed
by both of them.

1. Aim : The main aim is to earn money for meeting needs of

the employees and employers.
2. Qualifications : Each job requires some qualification.
Skilled or unskilled labour is required as per the nature
of the job. For skilled job some specific qualifications
are required e.g. Job of nurse. But no specific
qualification for unskilled job is necessary. e.g. Office
boy.
3. Monetary Returns : Wages or salaries is given as a
financial return to employee after completion of work.
Wages are decided in advance before appointment.
Wages are paid daily or weekly. Salary is paid monthly.
4. Capital : No capital is required for employment because
employer invests and provides everything to the
employee for completing the job.
5. Registration : No registration is required. Every employee
has to follow the rules and regulations mentioned in the
terms and conditions of employment contract.
6. Non-transferability : Employment cannot be transferred
from one person to another e.g.. If a teacher retires, then
he cannot transfer his job to his son or daughter.
7. Nature of work : Every employee is expected to complete
the work which is given to him. The nature of job decides
the nature of work.
BUSINESS OBJECTIVES
All business activities are classified as

1) Economic Objectives
2) Social Objectives

1) Economic Objectives
a) Earning Profit : Profit is required for survival of the business
and for its growth.
b) Searching New Customers : Business organizations have to
work hard to create new customers and also to maintain the
existing customers.
c) Innovations : It is a development which results into
improvement in product or process of production.
d) Best Possible Use of Resources :. They should be used to its
maximum and should not be wasted.

2) Social Objectives :

a) Supplying Quality Products :

b) Avoiding Unfair Trade Practices .
c) Employment Generation
d) Welfare of Employees
e) Help to Solve Social Problems
f) Contributing to the Welfare of the Society

Role of Profit in Busines

CLASSIFICATION OF BUSINESS ACTIVITIES Business activities may be
broadly classified into two categories

i) Industry
ii) ii) Commerce
Industry is concerned with the production of goods and
providing services, while commerce is mainly concerned
with their distribution.

Industry

Industry implies the economic activities that are concerned with the
conversion of resources into goods that are ready for use. This
involves production and processing of goods, mining, breeding and
rearing of animals. The goods produced may be consumer goods or
capital goods. It also creates services like banking, hotel, insurance,
tourism etc.
Industry creates form utility. It converts the raw material into usable
finished products.

Industries may be divided into Three broad categories

A) Primary Industry : Primary industry is concerned with nature. It is

a nature-oriented industry. The products of primary industry may be
used as the input of secondary industry. Primary industries are of
three types.

a) Agriculture Industry : This includes farming and cultivation of land.

The quality of products depend on many factors like fertility of land,
climatic conditions, rainfall etc.

b) Extractive Industry : This industry draws out products from natural

resources i.e. soil, air and water. Generally the products are in raw
form and they are used by manufacturing and construction
industries for producing finished products e.g.. extracting oil and
minerals from underground, fishing and forestry etc. It may be used
in crude form and may be sent to other industries for further
processing.

c) Genetic Industry : Genetic industries are engaged in reproduction

and multiplication of plants and animals. e.g. animal husbandry,
sericulture, horticulture etc.

B) Secondary Industry : These industries depend on primary

industries. They convert the raw material provided by primary
industry into finished products. e.g. Tomatoes provided by primary
industry are used for making sauce and ketchup.

Secondary Industries are of two types.

a) Manufacturing Industry : These industries are engaged in

transforming raw material into finished product with the help of
machine and manpower. The final goods may be capital goods or
consumer goods. e.g.. textiles, sugar, paper industry etc.

b) Construction Industry : These industries are engaged in the

construction of buildings, dams, bridges, roads, tunnels, canals,
metro etc. In case of other industries goods can be produced at one
place and sold at another place but goods made and sold by these
industries are at one place. This is only industry which creates
immovable wealth.

C) Tertiary Industries:They provide support services to primary and

secondary industries. Service facilities are provided by these
industries. It includes transport, banking which comes under
traditional category whereas in modern times hotel industry, tourism
industry, entertainment industry etc. are also included.

Commerce

Commerce is that part of business activity which is concerned with

distribution of goods and services produced by Industry. Commerce
bridges the gap between producers and consumers by exchange of
goods and services for money or money’s worth.
Commerce is further divided in

Trade and Auxiliaries to Trade

A] Trade : Trade denote buying and selling of goods and services.
Trade is an exchange of goods and services with money or money’s
worth. Trade facilitates transfer of ownership and possession of
goods and services from seller to the buyer.

Trade is further Classified as

a) Home Trade / Internal Trade : In this trade, buying and selling
of goods and services takes place within the geographical
boundries of a country. It uses local currency for the exchange
of goods and services.
 It is further divided as follows –
i) Wholesale Trade : In wholesale trade, goods are
purchased and sold in bulk. A wholesaler purchases in
large quantities from the producers and sells in small
quantities to the retailers. He is the link between the
producer and the retailer.
ii) Retail Trade : Retail trade is business activity associated
with the sale of goods to the final consumers. A retailer is
the one who purchases from the wholesaler or
sometimes directly from the producer and sells them in
smaller quantities to final consumer. Retailer is the link
between wholesaler or sometimes manufacturer and
ultimate consumer.

b) Foreign Trade / External Trade : When trade takes place

between different countries, it is known as foreign trade. When
boundaries of two countries are crossed then different
currencies are used.
It is further divided as :
i) Import Trade : When goods and services are purchased
from another country it is called as import trade.
ii) Export Trade : When goods and services are sold to
foreign buyers then it is called as export trade.
iii) Entrepot Trade : It is the combination of import/export
trade. It involves importing the goods from one country
and reselling these goods to another country. e.g. Indian
Seller importing goods from Japan and re-exporting same
goods to Africa.

B] Auxiliaries to Trade
All those activities that facilitate smooth flow of goods from
manufacturing centers to the consumption centers are called aids to
trade or auxiliaries to trade.
Following are various Auxiliaries to Trade.

i) Transport : The goods are produced at one place but they

are demanded in many other places. So goods are to be sent
to different places where they are demanded. Modes of
transport help movement of men and materials from one
place to another.
ii) Warehousing : There is a gap between production and
consumption. Certain goods are produced throughout the
year but consumed only in a particular part of the year eg.
Umbrellas, raincoats and vice versa. Therefore storage is
very important. The goods should be stored carefully from
the time they are produced till the time they are sold
without loss/damage Warehouses help in storage and are
also called godowns. Price is maintained at a reasonable
level and there is a continuous supply of goods and services.
iii) Insurance : There are various risks involved in the business.
The goods may be destroyed while in production process or
in transit due to accidents or in storage due to fire or theft.
The businessmen would like to cover these risks. Insurance
companies undertake to compensate the loss suffered due
to such risks. The businessman has to insure his goods and
pay premium regularly. Risks cannot be avoided completely
but they can be minimized by taking insurance policy.
iv) Banking : We require money to start the business and to run
it smoothly. Banks supply money. Adequate funds can be
obtained from the bank. Bank provides loans, overdraft, cash
credit etc. to businessmen. Banks also provide many services
like cheques, drafts debit cards, credit cards, online
transactions etc. It helps the traders to carry their business
activities smoothly.
v) Advertising : Advertising is an effective aid in selling the
goods. The producer communicates all information about
goods and services to create a strong desire in consumer to
buy the products. It can be carried in different ways. It can
 be indoor and outdoor. Communicating with the people
when they are in their homes is called indoor advertising.
For example, newspaper, radio, TV, etc. Communicating with
people when they go out from their homes is called as
outdoor advertising e.g. posters, hoardings at prominent
places, neon sign board etc.
vi) Mercantile Agents : Customers are scattered over a very
wide area. It is not possible for seller to contact the
customers. This difficulty is solved by mercantile agents.
They bridge the gap between buyer and seller. Brokers,
Estate Agents etc. are some examples of mercantile agents.
vii) Communication : In today’s world there is information
explosion. There is a need of communication to facilitate the
traders, producers and consumers to exchange information
with one another. Various means of communication such as
cell phones, postal services, email etc. are made available.

Justify the following statements.

1) Retailer is in direct contact with ultimate consumers

Ans. a. Retail trade deals with sale of goods to the final consumers.
b. Retailer is the last link in the chain of distribution.
c. Retailer purchases from wholesalers or sometimes directly from
producer and sells them to the final consumer.
d. Retailer is link between wholesaler or producer and ultimate
consumer.
e. Thus, retailer comes in direct contact with the final consumers.

2) Risk is inevitable in business activities

Ans. a. Risk is concerned with exposure to loss.
b. Every business has some risk or other.
c. Risk can be minimised but cannot be avoided.
d. Factors which are not under the control of businessman are risk
like change in fashion, fire, theft etc.
e. Thus, Risk is inevitable in business activities

3) Combination of Import-export trade is entrepot trade.

Ans. a. Foreign trade is classified into import trade, export trade and
entrepot trade.
b. In import trade goods are purchased from another country.
c. In export trade goods are sold to another country.
d. In Entrepot trade goods are purchased from one country and sold
to another country.
e. Thus, Combination of Import-export trade is entrepot trade

4) Transport creates place utility

Ans. a. Goods are produced in one place and demanded in other
places.
b. They need to be sent to the places where they are demanded.
c. Transport helps to move men and material from one place to
another.
d. The goods can be sent to place where demanded by means of
transport.
e. Thus, Transport creates place utility.

5) Industrial activities take place before commerce starts its role.

Ans. a. Industry is related to production of goods and providing
services.
b. Commerce is related to distribution of goods.
c. After production is complete goods need to distributed where they
are demanded.
d. Role of commerce starts after completion of production in
industries.
e. Thus, Industrial activities take place before commerce starts its
role.

6. Wholesaler is a link between retailer and manufacturer.

Ans. a. In wholesale trade goods are purchased and sold in large
quantities.
b. Wholesaler purchases goods in large quantities from the
producers and sell in smaller quantities to the retailer.
c. He is the link between producer and retailer.
d. Thus, . Wholesaler is a link between retailer and
manufacturer.Wholesaler is a link between retailer and
manufacturer.

7) Business is a part of economic activities

Ans. a. The main motive to start business is to earn profits,
b. it is done to earn money and livelihood.
c. The activities done without monetary expectations does not come
under business.
d. Business is an economic activity involving production or purchase
of goods and services to earn profits.
e. Thus, Business is a part of economic activities.