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Business in the Economy
The Role of Business in Economic Development
Business activities are fundamental to the growth and development of any country.
In ancient times, trading significantly contributed to the prosperity of the Indian
subcontinent, referred to as 'Swaran Bharat and Swaran Dweep' by travelers,
highlighting the region's economic richness.
Meeting Needs Through Business
All human beings require goods and services. These are typically acquired in physical
or online markets, where various sellers offer commodities. Business is a major
economic activity involving the production and sale of these goods and services. It
begins with production and ends with consumption, with commerce playing a crucial
role in making finished products available to consumers. Business encompasses
industry, trade, and commerce.
Historical Significance of Trade
India's history reveals that trading activities were central to its economy, facilitated
by water and land routes like the Silk Route. These activities generated surplus
income, supporting various economic activities such as agriculture, weaving, and
handicrafts. The use of Hundi and Chitties (documents facilitating money transfer)
promoted safe transactions, addressing the risks associated with long-distance
travel.
Evolution of Trade Centers
Many trade centers developed in ancient times, including:
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Patliputra
Peshawar
Taxila
Indraprastha
Mathura
Varanasi
Mithila
Ujjain
Surat
Kanchi
Madura
Broach
Kaveripatta
Tamralipti
These centers facilitated the import and export of goods, contributing to economic
prosperity. Here is a chart from the transcript showcasing the economic dominance of
different regions through time:
Post-Independence Economic Measures
After independence, India focused on rebuilding its economy through centralized
economic planning and public investment in key industries. However, challenges such
as capital formation and fiscal deficits led to economic liberalization in 1991,
adopting a three-pronged approach:
Stabilization
Restructuring
Globalization
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India's Economic Status Today
Today, India is one of the fastest-growing economies, attracting FDI. Government
initiatives like 'Make in India', 'Skill India', and 'Digital India' are expected to further
boost the economy.
Concept of Business
The term "business" is derived from the word "busy." It refers to an occupation where
people regularly engage in activities related to the:
Purchase
Production
Sale of goods and services with the aim of earning profits
Economic vs. Non-Economic Activities
Economic Activities Non-Economic Activities
Activities done out of love, sympathy, or
Activities to earn a livelihood
patriotism
Worker in a factory, doctor in a clinic,
Housewife cooking, boy helping an old man
teacher
Definition of Business
Business may be defined as an economic activity involving the production
and sale of goods and services undertaken with a motive of earning profit
by satisfying human needs in society.
Characteristics of Business
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1. Economic Activity: Undertaken to earn money or livelihood.
2. Production or Procurement of Goods and Services: Goods must be produced
or acquired for consumption.
3. Sale or Exchange of Goods and Services: Transfer of goods and services for
value.
4. Dealings on a Regular Basis: Regular transactions, not just a single sale or
purchase.
5. Profit Earning: Essential for survival.
6. Uncertainty of Return: Lack of knowledge about the amount of money to be
earned.
7. Element of Risk: Uncertainty associated with potential loss.
Comparison of Business, Profession, and
Employment
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Feature Business Profession Employment
Membership of a
Mode of Entrepreneur’s decision Appointment letter
professional body
Establishment and legal formalities and service agreement
and certificate
Rendering Performing work as
Provision of goods and
Nature of Work personalized, expert per service contract or
services to the public
services rules of service
Qualifications, Qualification and
No minimum
Qualification expertise, and training as prescribed
qualification
training by the employer
Reward or
Profit earned Professional fee Salary or wages
Return
Capital investment
Capital
required as per size and Limited capital No capital required
Investment
nature of business
Profits are uncertain Fee is generally
Fixed and regular pay;
Risk and irregular; risk is regular and certain;
no or little risk
present some risk
Transfer of Transfer possible with
Not possible Not possible
Interest some formalities
Code of Professional code of Norms of behavior laid
No code of conduct
Conduct conduct down by the employer
Jobs in banks,
Legal, medical
insurance companies,
Example Shop, factory profession, chartered
government
accountancy
departments
Classification of Business Activities
Business activities are divided into:
Industry
Commerce
Industry
Industry is concerned with the production and processing of goods and materials.
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Primary Industries
Concerned with the extraction and production of natural resources.
(a) Extractive Industries: Extract products from natural sources (e.g., farming,
mining).
(b) Genetic Industries: Breeding plants and animals (e.g., cattle breeding farms,
poultry farms).
Secondary Industries
Use materials extracted by primary industries.
(a) Manufacturing Industries: Producing goods through processing raw
materials.
Analytical (e.g., oil refinery)
Synthetical (e.g., cement)
Processing (e.g., sugar and paper)
Assembling (e.g., television, car, computer)
(b) Construction Industries: Building infrastructure (e.g., buildings, dams,
bridges).
Tertiary Industries
Provide support services to primary and secondary industries.
Transport
Banking
Insurance
Warehousing
Communication
Packaging
Advertising
Commerce
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Commerce includes activities necessary for facilitating the exchange of goods and
services. This image from the lecture transcript is a chart demonstrating the various
divisions of business activities:
Components of Commerce
Trade
Auxiliaries to trade (services)
Commerce links producers and consumers by removing hindrances related to:
Persons
Place
Time
Risk
Finance
Information
Trade and Auxiliaries
Trade involves the sale, transfer, or exchange of goods. Auxiliaries to trade are
activities assisting trade, like transportation, banking, and advertising.
Auxiliaries to Trade
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Auxiliaries to trade are activities that facilitate industry and trade. They play a
supportive role in the distribution of goods. Here are some examples of auxiliaries to
trade:
Transport
Banking
Insurance
Warehousing
Advertising
These activities support trade, industry, and the entire business activity by
removing hindrances related to the production and distribution of goods.
Transport and Communication
Production often occurs in specific locations, while goods are needed for consumption
throughout the country.
Transport removes the obstacle of place by moving goods from
production sites to consumption areas via road, rail, or coastal shipping.
Transport also facilitates the movement of raw materials to production sites and
finished goods to consumers. Communication facilities, such as postal services and
telephones, enable producers, traders, and consumers to exchange information.
Banking and Finance
Banking helps businesses overcome financial obstacles by providing
funds for acquiring assets, purchasing raw materials, and covering
expenses.
Commercial banks offer services such as:
Overdraft and cash credit facilities
Loans and advances
Remittance of funds
Discounting of bills
Assistance in foreign trade and raising capital
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Insurance
Insurance provides protection against various types of business risks, such
as fire, theft, damage, and accidents, by offering compensation for losses
in exchange for a premium.
Insurance covers:
Factory buildings, machinery, and furniture
Materials and goods in stock or transit
Employees against accidents and occupational hazards
Warehousing
Warehousing helps businesses overcome storage problems and ensures
goods are available when needed by providing storage facilities to
prevent loss or damage.
Warehousing creates time utility by storing goods until they are required, helping to
maintain reasonable price levels.
Advertising and Public Relations
Advertising is a paid activity that promotes products or services, while
public relations (PR) is typically unpaid and involves building mutually
beneficial relationships.
Advertising and PR activities:
Promote the sale of products and services
Provide information about features and prices
Persuade potential customers about the utility of products
Use press releases in print and social media
Advertising is a paid activity using print or non-print media, while PR involves
strategic communication. There's an old saying: “Advertising is what you pay for and
PR is what you pray for”.
Objectives of Business
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An objective is the desired outcome that a business aims to achieve.
Businesses are directed towards achieving certain objectives, which may include
profit, social responsibility, and long-term survival.
Profit as an Objective
Profit is often considered a primary objective of business. When business is an
attempt to reap more than what has been invested, profit is the excess of revenue
over cost.
Profit is essential for:
Providing income for business owners
Funding business expansion
Indicating efficient business operations
Signifying societal approval of the business's utility
Building the reputation of a business
However, overemphasizing profit can lead to neglect of responsibilities towards
customers, employees, investors, and society, potentially resulting in opposition and
business losses.
Multiple Objectives
Businesses need multiple objectives to balance various needs and goals.
Objectives should be specific to every area and sphere of business,
enabling the business to analyze performance and improve.
Some key areas for business objectives include:
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Market standing: Maintaining goodwill and a strong market position relative to
competitors.
Innovation: Introducing new ideas and methods in products, services, and
business activities to gain a competitive edge.
Productivity: Maximizing the value of output compared to input to ensure
efficiency.
Physical and financial resources: Acquiring and efficiently using physical
resources (e.g., plants, machines) and financial resources.
Earning profits: Achieving reasonable profits in relation to capital employed.
Social responsibility: Contributing resources to solve social problems and
operating in a socially desirable manner.
Business Risk
Business risk is the possibility of inadequate profits or losses due to
uncertainties or unexpected events.
Types of Business Risks
Speculative risks: Involve both the possibility of gain and loss, arising from
market changes, supply and demand fluctuations, and changes in prices or
consumer tastes.
Pure risks: Involve only the possibility of loss (e.g., fire, theft, strikes).
Nature of Business Risks
Characteristics of business risks include:
1. Risk is essential: Every business faces some level of risk, which cannot be
entirely eliminated.
2. Arises from uncertainties: Uncertainty about future events (e.g., natural
disasters, changes in demand, technological advancements) creates risks.
3. Depends on nature and size: The type of goods/services and the scale of
business influence the degree of risk.
4. Profit is the reward: Higher risk is associated with the potential for higher
profit. ‘No risk, no gain’ is an age-old principle which applies to all types of
business.
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Causes of Business Risks
Business risks arise from various causes:
Cause Description
Natural Events like floods, earthquakes, and famines that affect property and
causes income.
Human Dishonesty, carelessness, negligence of employees, strikes, riots, and
causes management inefficiency.
Economic Uncertainties in demand, competition, price changes, collection of
causes dues, and technological changes.
Political disturbances, mechanical failures, fluctuations in exchange
Other causes
rates, and unforeseen events.
Starting a Business
Entrepreneurship is the process of setting up one’s own business.
Factors to Consider
Key factors to consider when starting a business include:
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1. Selection of type of business: Choosing the nature and type of business based
on potential profits, customer requirements, and technical knowledge.
2. Scale of operation: Determining the size of the business, whether it will
operate for manufacturing or tertiary sector, and whether it will be MSME or
large scale.
3. Location: Selecting a suitable location considering the cost of production,
availability of raw materials, labor, power supply, banking, transportation,
communication, and warehousing.
4. Financing: Providing capital for fixed assets, current assets, and day-to-day
expenses.
5. Physical facilities: Ensuring the availability of machines, equipment, buildings,
and supportive services.
6. Workforce: Identifying the requirement of skilled and unskilled workers and
managerial staff.
7. Tax planning: Considering liabilities under various tax laws.
8. Launching the enterprise: Mobilizing resources, completing legal formalities,
starting production, and initiating sales promotion.
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