CBSE Class 11 Business Studies Chapter 1 Notes: Business, Trade & Commerce or Nature and Purpose of Business

Class 11 Business Studies Chapter 1 Notes (Business, Trade & Commerce or Nature and Purpose of Business)

There are two names for Class 11 Business Studies Chapter 1. In some textbooks, it is Nature and Purpose of Business. However, in the official textbook of NCERT, it is Business, Trade & Commerce. 

We are aware of this naming variation, so you don’t need to worry. 

Our Business Studies notes are prepared by expert CBSE BST teachers, and you can learn from the quick revision notes below for Class 11 Chapter 1.

Before you proceed, below are the quick details:

• Class: 11
• Subject: Business Studies
• Chapter Number: 1
• Chapter Name: Small Business/MSME and Business Entrepreneurship

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Introduction

All human beings, wherever they may be, require different types of goods and services to satisfy their needs. If we look around, we observe that people require different types of products and services to satisfy their needs. How do they buy them? They go to a market, either physical or electronic over the internet, where they find a variety of shops and sellers offering the required commodities and choose the best ones that they require.

Business starts with production and ends with consumption. Making the finished products reach the consumer involves a series of steps.

Role of Business in the Development of Economy

Business, which includes trade and commerce, has played a vital role from time immemorial. Archaeological evidence has shown that trading activities were the mainstay of the economy in ancient times. Goods were traded both internally and in foreign lands, which generated surplus income. As a result, people were engaged in various economic activities such as agriculture and the domestication of animals, weaving cotton, dyeing fabrics, making clay pots, utensils and handicrafts, sculpting, cottage industries, masonry, etc. Family-based workshops, called karkhanas, for manufacturing were important components of economic life. An example of this is the use of age-old Hundis and Chitties, used in the southern region. These were used as documents to facilitate the transfer of money from one hand to another for trading activities. As an instrument of exchange, it involved a contract that: Warranted the payment of money, with the promise or order being unconditional. Was capable of change through transfer by valid negotiation.

Major Trade Centres in Ancient Times

Trade Centre	Details
Pataliputra	It is known as Patna today. It was not only a commercial town but also a major centre for exports of stones.
Peshawar	It was an important exporting centre for wool and for the import of horses. It had a huge share in commercial transactions between India, China, and Rome in the first century A.D.
Taxila	It served as a major centre on the important land route between India and Central Asia. It was also a city of financial and commercial importance. The city occupied an important place as a Buddhist centre of learning. The famous Taxila University flourished here.
Indraprastha	It was the commercial junction on the royal road where most routes leading to the east, west, south, and north converged.
Mathura	It was an emporium of trade, and people here subsisted on commerce. Many routes from South India touched Mathura and Broach.
Varanasi	It was well placed as it lay both on the Gangetic route and on the highway that linked North with the East. It grew as a major centre of the textile industry and became famous for beautiful gold silk cloth and sandalwood workmanship. It had links with Taxila and Bharuch.
Mithila	The traders of Mithila crossed the seas by boat through the Bay of Bengal to the South China Sea and traded at ports on the islands of Java, Sumatra, and Borneo. Mithila established trading colonies in South China, especially in Yunnan.
Ujjain	Agate, carnelian, muslin, and mallow cloth were exported from Ujjain to different centres. It also had trade relations through the land route with Taxila and Peshawar.

Hundi

A hundi is a financial instrument that was developed in medieval India in order to facilitate trade and credit transactions.

Hundi as Practiced by Indian Merchant Communities

Hundi	Type	Details
Dhani-jog	Darshani	Payable to any person, with no liability for whoever received the payment.
Sah-jog	Darshani	Payable to a specific person, someone “respectable”. Liability rests with whoever received the payment.
Firman-jog	Darshani	A Hundi is made payable to order.
Dekhan-har	Darshani	Payable to the presenter or bearer.
Dhani-jog	Muddati	Payable to any person, with no liability for whoever received the payment, but payment is made over a fixed term.
Firman-jog	Muddati	A Hundi is made payable to order following a fixed term.
Jokhmi	Muddati	Drawn against dispatched goods. If goods are lost in transit, the drawer or holder bears the costs, and the drawee carries no liability.

Types of Hundis

Type of Hundi	Details
Dhani Jog Hundi	The term “Dhani” means “owner”, i.e., the owner of the dhan, or amount, of the hundi. It is a hundi payable to the dhani or owner, a holder, or a bearer owner. It is transferable by mere delivery.
Shahjog Hundi	It is a hundi drawn by one merchant on another, asking the latter to pay the amount to a shah. A shah is a rich, respectable, and responsible person, a man of worth, and known in the bazaar. A shahjog hundi passes from one hand to another until it reaches a shah, who, after reasonable enquiries, presents it to the drawee for acceptance of the payment.
Firman Jog Hundi	The term “Firman” means “order”. This type of hundi can be paid either to the person whose name is mentioned in the hundi or to any person so ordered by him. This hundi is similar to a cheque payable to order, and no endorsement is required on such a hundi.
Dekhanhar Jog Hundi	The term “Dekhanhar” means the one who sees it. Thus, a Dekhanhar Jog Hundi is one which is made payable to its seer or its holder, i.e., it is made payable to the bearer.
Jokhami Hundi	The term “Jokham” means “risk”, and the term “Jokhami” means “risky”. That is why a Jokhami Hundi has been termed by Justice Baley, in the case titled Rajsey A. Merchant vs Jusraj Vizpal, 1871, as being in the nature of an insurance policy. But with a difference: in the case of a Jokhami Hundi, the amount mentioned therein is paid in advance, which may, however, be recovered in case the slip is not lost. There are the following three parties in a Jokhami Hundi: The drawer or the shipper, consignor, of the goods. The hundiwala, i.e., the underwriter, who undertakes the risk. The malwala, i.e., the consignee of the goods.
Jawabee Hundi	Jawabee Hundi refers to a hundi that is used as a means of remittance of money from one place to another through a banker.

Human Activities

Types of Human Activities:

• Economic Activities
• Non-economic Activities

Economic and Non-economic Activities

Topic	Details
Economic Activities	Economic activities are those human activities which are performed to earn a livelihood. For example: a worker working in a factory, a doctor operating his clinic, and a teacher teaching in a school, etc.
Non-economic Activities	Non-economic activities are those human activities which are performed out of love, sympathy, sentiment, patriotism, etc. For example: a housewife cooking food for her family, and a girl helping a blind man, etc.
Business Firm	Those organizations which perform business are called business firms.

Differences Between Economic Activities and Non-economic Activities

Basis	Economic Activities	Non-economic Activities
Definition	Those human activities which are performed to earn a livelihood are called economic activities.	Those human activities which are performed out of love, sympathy, sentiment, patriotism, etc. are called non-economic activities.
Aim	The main aim of these activities is to earn profits.	The main aim of these activities is psychological satisfaction.
Result	The result of economic activities is the production of goods and services.	The result of these activities is the mental satisfaction of the person performing them.
Example	Teacher, lawyer, doctor, etc.	A teacher teaching his son, and a doctor treating his son, etc.

Types of Economic Activities

• Business
• Profession
• Employment

Business

The term business is derived from the word “busy”. Thus, business means being busy. Business refers to an occupation in which people regularly engage in activities related to the purchase, production, and sale of goods and services to earn profits.

Industry

• Industry refers to economic activities which are connected with the conversion of resources into useful goods. Activities like producing, processing of goods, and breeding and raising of animals are also included in industry.
• Groups or firms producing similar or related goods come under industry. For example, the electronic industry would include all firms producing electronic goods, and so on.

Types of Industries

• Primary Industries
• Secondary Industries
• Tertiary Industries

Differences Between Business, Profession, and Employment

Basis	Business	Profession	Employment
Mode of Establishment	Business is established by the entrepreneur’s decision or other legal formalities, if required.	A profession can be commenced by getting membership in a professional body and a certificate of practice.	Employment commences with the acceptance of the appointment letter and service agreement.
Nature of Work	Business involves the provision of goods and services to the public.	A profession involves rendering personalized expert services.	Employment involves doing the work as per the service contract or rules of service.
Qualification	In business, no minimum qualification is necessary.	Professionals are required to be experts in their fields, possessing a high degree of expertise and training.	In employment, qualification and training are required as prescribed by the employer.
Reward or Return	Profit is the reward for performing business activities.	The fee is the reward for providing professional services.	Salary and wages are the rewards in the course of employment.
Capital Investment	Capital investment is required as per the nature and size of the business.	Limited capital is required for establishment in the profession.	Capital investment is not required in the case of employment.
Risk	In business, the profits are uncertain and irregular. Hence, risk is present.	The fee is generally regular and certain. Hence, little risk is involved.	Employment does not involve any risk as compared to business and profession.
Code of Conduct	No code of conduct is prescribed in business.	A professional code of conduct is to be followed in the case of a profession.	The rules and regulations are laid down by the employer and need to be followed.
Transfer of Interest	In business, transfer of interest is possible with some legal formalities.	In the case of a profession, transfer of interest is not possible.	In the case of employment, transfer of interest is not possible.
Example	Shop, factory, etc.	Chartered accountant, lawyer, teacher, etc.	Jobs in banks, insurance companies, government departments, etc.

Primary Industries

It refers to those industries which are concerned with the extraction and production of natural resources and the reproduction and development of living organisms, plants, etc.

Primary Industries Are Further Divided as Follows:

Extractive Industries	Genetic Industries
This industry involves the extraction of products from natural sources. These industries provide such products which are used as raw materials by many manufacturing industries. For example: mining, agriculture, fishing, farming, etc.	Genetic industries are concerned with the breeding of plants and animals for their use in further reproduction. For example: seed and nursery companies, cattle breeding farms, dairy farms, fish hatcheries, poultry farms, etc.

Secondary Industry

• These are concerned with using materials which have already been extracted at the primary stage and processing such goods for final consumption. 
• For example, mining iron ore is a primary industry, but the manufacturing of steel is part of a secondary industry.

Secondary Industries Are Further Divided as Follows:

Type of Secondary Industry	Details
Construction Industries	The industries that involve engineering and architectural skills to construct dams, bridges, buildings, etc.
Manufacturing Industries	Manufacturing industries are those that involve the conversion and processing of materials into finished goods. They create utilities. For example: the conversion of iron into steel, sugarcane into sugar, etc. Manufacturing industries are further divided as follows: Processing Industries: These industries involve the processing of raw materials through various stages of production to get finished goods. For example: the paper industry, textile industry, sugar industry, etc. Assembling Industries: These industries are concerned with assembling different parts to make a new product. For example: television, car, computers, etc. Analytical Industries: These industries are concerned with analyzing and separating different elements from the same material. For example: oil refinery. Synthetical Industries: These industries combine various products to make a new product. For example: cement, paint, etc.

Tertiary Industries

• It provides various services to the primary and secondary industries. 
• It also provides help in trading activities. 
• For example: transport, banking, insurance, warehousing, communication, advertising, etc.

Commerce

• The activities which are necessary for facilitating the exchange of goods and services are included under commerce. The main function of commerce is to facilitate the free flow of goods and services by removing various hindrances in the process of exchange. 
• The hindrances may be in respect of person, place, time, risk, finance, etc. These hindrances are removed by various activities in commerce, like advertising, warehousing, and banking. 
• Commerce provides the necessary link between producers and consumers.

Commerce includes two types of activities:

• Trade
• Auxiliaries to Trade

Trade

• Activities relating to the sale, transfer, or exchange of goods are known as components of trade. 
• Trade is that part of business activities which is involved in the buying and selling of goods. 

Types of Trades

• Internal Trade 
• External Trade

Internal Trade

Topic	Details
Internal Trade	Internal trade refers to the buying and selling of goods within the geographical boundaries of the country. It may be divided into wholesale and retail trade.
Wholesale Trade	When goods are bought and sold in large quantities, it is known as wholesale trade.
Retail Trade	When goods are bought and sold in smaller quantities, it is known as retail trade.

External Trade

Topic	Details
External Trade	External trade refers to the buying and selling of goods and services between persons and organizations belonging to different countries. It is further divided into three categories.
Import	It means purchasing goods from another country.
Export	It means selling goods to another country.
Entrepot	It means importing goods to export them to other countries.

Auxiliaries to Trade

• The activities which help in the process of trading are known as auxiliaries to trade. These activities play a supportive role in the free flow of goods and services. 
• These help in removing various hindrances, which may be in respect of place, finance, time, risk, persons, knowledge, etc. 
• The various auxiliaries are transport, banking, insurance, warehousing, advertising, etc.

Auxiliaries to Trade and Their Role in Commerce

Auxiliary	Details
Transport	Goods are produced at a particular location but are needed at different places in the country. For example: sugar is mainly produced in Uttar Pradesh, but it is consumed all over the country. This hindrance of place is removed by various means of transportation like railways, waterways, roadways, etc. These services not only facilitate the movement of finished goods but also the movement of raw materials.
Banking	Every business requires funds for long-term or short-term purposes. The money required for a short-term period is known as working capital requirements, whereas the money required for a long-term period is known as fixed capital requirements. All these financial needs are fulfilled with the help of finance. Therefore, banking helps in removing the hindrance of finance. The main source of finance is a bank. Commercial banks accept deposits and provide funds as per the requirements of persons. They also perform some basic functions like collection and payment of various items, etc.
Insurance	Risk is always associated with business. Various assets like plant and machinery, buildings, furniture, etc. kept in warehouses are subject to the risk of loss or damage. Also, employees of every organization require protection against accidents due to the use of complex machines. This hindrance of risk is removed by insurance, as in case of any loss, the loss suffered can be recovered from the insurance company.
Warehousing	Generally, goods are not consumed immediately after production. There is always a time gap between the production and consumption of goods. Thus, it becomes essential to store goods in such a way that these are available whenever they are required. Thus, the hindrance of storage is removed by warehousing. It ensures a continuous supply of goods which helps in maintaining a reasonable level of prices.
Advertising	Advertising is always the most important tool of sales promotion. It is not possible for a producer to personally contact every consumer and provide information about products. Advertisement provides the necessary information to the consumers about the product, like price, quality, uses, availability, etc. It also motivates consumers to buy them. Thus, advertising helps in removing the hindrance of information.

Role of Commerce in the Removal of Hindrances in the Process of Exchange

Topic	Details
Commerce Activities	Commerce includes two types of activities, viz., trade and auxiliaries to trade. Buying and selling of goods is termed trade. But 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 transport, banking, insurance, communication, advertising, packaging, and warehousing.
Role of Commerce	Commerce provides the necessary link between producers and consumers. It embraces all those activities that 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. The hindrances may be in respect of persons, place, time, risk, finance, etc.
Hindrance of Persons	Trade removes the hindrance of persons by making the goods available to the consumers from the producers.
Hindrance of Place	Transportation removes the hindrance of place by moving goods from the places of production to the markets for sale.
Hindrance of Time	Storage and warehousing activities remove the hindrance of time by facilitating the holding of stock of goods to be sold as and when required.
Hindrance of Risk	Insurance removes the hindrance of risk. Goods held in stock, as well as goods in the course of transport, are subject to a risk of loss or damage due to theft, fire, accidents, etc. Protection against these risks is provided by the insurance of goods.
Hindrance of Finance	Banking removes the hindrance of finance. The capital required to undertake the above activities is provided by banking and financing institutions.
Hindrance of Information	Advertising removes the hindrance of information. Advertising makes it possible for producers and traders to inform consumers about the goods and services available in the market.
Conclusion	Commerce is said to consist of activities that remove the hindrances of persons, place, time, risk, finance, and information in the process of exchange of goods and services.

Characteristics of Business Activities

Characteristic	Details
An Economic Activity	Business is concerned with an economic activity because it is undertaken to earn money. It does not include such activities which are done out of love, sympathy, affection, etc.
Production or Procurement of Goods and Services	The business enterprise either produces goods or procures them from the producers before they are offered for sale. The goods can be consumable goods, like sugar, pens, clothes, etc., or capital goods, like machinery, tools, etc., and services like transport, banking, etc.
Sale or Exchange of Goods and Services	Business involves the sale or exchange of goods or services for money. It cannot be called a business activity if goods are produced for self-consumption and not for sale. Thus, the sale or exchange of goods or services between the seller and the buyer is an essential feature of business.
Dealing in Goods and Services on a Regular Basis	One single transaction of sale and purchase cannot be termed a business. Business must involve the exchange of goods and services on a regular basis. For example: if a person sells his personal computer, it cannot be termed as a business. However, if he continuously deals in the sale and purchase of computers, it will be regarded as a business.
Profit Earning	The main aim of every business is to earn profits. Profit earning is essential for the survival of the business. Hence, a businessman always tries to minimize costs and maximize profits.
Uncertainty of Return	Another important feature of every business is the uncertainty of return. A businessman invests money into the business, but he is not certain about the amount of profit that he may earn. Moreover, there is a chance of losses despite the best efforts put into the business.

Business Risk

• The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. 
• For example, due to a change in fashion or the tastes and preferences of customers, the demand for a particular product may decrease, which results in a reduction in sales as well as profits.

Types of Business Risks

• Speculative Risk: 
• It involves both the possibility of gain as well as the possibility of loss. In case of favorable market conditions, there would be gains, but in case of unfavorable conditions, there are possibilities of losses.
• It is the risk which arises due to changes in the condition of the market. For example, changes in fashion, technology, price, etc.

• Pure Risk:
• It involves only the possibility of loss or no loss. It is the risk which arises due to fire, theft, or strike.
• The occurrence may result in loss, whereas non-occurrence will result in the absence of loss instead of gain.

Causes of Business Risks

Cause	Details
Natural Causes	Human beings have little control over natural calamities. Natural calamities like floods, earthquakes, heavy rains, famines, etc. result in heavy loss of life, property, and business income.
Human Causes	Unexpected events like dishonesty, carelessness, or negligence of employees, stoppage of work due to power failure, etc. are some examples of human causes that result in business risk.
Economic Causes	These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, methods of production, etc. These also include some financial problems like an increase in interest rates, tax rates, etc., which result in higher costs of operations.
Other Causes	These include uncertainties like political disturbances, mechanical failures, fluctuations in exchange rates, etc., which lead to the possibility of business risk.

Nature of Business Risks

Nature	Details
Business Risks Arise Due to Uncertainties	Uncertainty refers to the lack of knowledge about what is going to happen in the future. Therefore, uncertainties like natural calamities, changes in government policies, changes in demand, etc. create risk for business.
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 minimized, but cannot be eliminated.
Degree of Risk Depends Mainly upon the Nature and Size of Business	The nature of business, i.e., the type of goods and services produced and sold, and the size of business, i.e., the volume of production and sale, 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 a small-scale business.
Profit Is the Reward for Risk-taking	Profit and risk are directly related to each other. Profit is the reward for risk-taking. The greater the risk, the higher is the chance of profit, whereas if the risk is low, profit may also be low.

Multiple Objectives of Business

Objective	Details
Market Standing	It refers to the position of an enterprise in relation to its competitors. A business enterprise must aim at standing on a stronger footing in terms of offering competitive products to its customers and providing them maximum satisfaction.
Innovation	Innovation is the introduction of new ideas or methods in the way something is done. There are two kinds of innovation in every business: Innovation in goods and services. Innovation in various skills and activities needed to supply products and services.
Productivity	Productivity is ascertained by comparing the value of output with the value of inputs. It is used as a measure of efficiency. Greater productivity ensures continuous growth through the best utilization of resources.
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 very important for its survival and growth.
Managerial Performance and Development	Business enterprises need managers to conduct and coordinate business activity. Hence, managerial performance is an important objective, and enterprises must actively work for this purpose.
Worker Performance and Attitude	Workers’ performance and attitudes determine their contribution towards the productivity and profitability of any enterprise. Therefore, every enterprise must aim at improving its workers’ performance.
Social Responsibility	It refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner.

Basic Factors Considered Before Starting a Business

Factor	Details
Selection of Line of Business	The first thing to be decided by an entrepreneur is the nature and type of business to be undertaken. For example: fashionable goods, grocery shops, refreshments, etc.
Size of the Firm	The size of the firm or scale of its operations is another important decision taken while starting a business. If market conditions are uncertain and risks are high, a small-scale business would be a better choice. If the conditions are certain and there is moderate risk, and the owner is confident, then he may go for a large-scale business.
Choice of Form of Ownership	Concerning ownership, the business organization may take the form of a sole proprietorship, partnership, or joint stock company. The choice will depend on such factors as the line of business, capital requirements, legal formalities, and so on.
Location of Business Enterprise	An important factor to be considered at the start of the business is the place where the enterprise will be located. Availability of raw materials and labour, power supply, and services like banking, transportation, communication, warehousing, etc. are important factors while choosing a location.
Finance	Before starting the business, proper financial planning must be done with the main objective of determining the requirement of capital, the source from where capital will be raised, and the best ways of utilizing the capital.
Tax Planning	Tax planning becomes necessary because of the multiple taxes in the country. Therefore, the founder of the business has to consider the tax liability under various tax laws and its impact on business decisions.
Launching the Enterprise	After making the above decisions related to various factors, the entrepreneur can go ahead with the actual launching of the business, which means utilizing resources, fulfilling legal formalities, starting production, and initiating the sales promotion campaign.

The End

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A List of Notes:

Chapter 1  |  Chapter 2  |  Chapter 3  |  Chapter 4  |  Chapter 5  |  Chapter 6  |  Chapter 7  |  Chapter 8  |  Chapter 9  |  Chapter 10

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