Business, Trade and Commerce

Business is considered an economic activity because it is undertaken with the objective of earning money or livelihood and not out of love, affection, sympathy, or any other sentimental reason. It involves the production and sale of goods and services on a regular basis for a profit motive.

Business contributes to economic development by:

• Utilizing the country’s natural resources efficiently.
• Generating employment opportunities.
• Improving the standard of living by providing diverse goods and services.
• Contributing to the national income (GDP) through production and exports.

Economic activities are broadly classified into three categories:

• Business: Production/purchase and sale of goods for profit.
• Profession: Providing specialized services based on professional qualifications (e.g., Doctor, CA).
• Employment: Working for others in exchange for wages or salary.

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.

Business activities are classified into two broad categories:

• Industry: Concerned with the production or processing of goods (Primary, Secondary, Tertiary).
• Commerce: Concerned with the distribution of goods (Trade and Auxiliaries to Trade).

Industries are classified into three types:

• Primary Industries: Extraction and production of natural resources (e.g., Mining, Agriculture, Fishing).
• Secondary Industries: Processing materials into finished goods (e.g., Manufacturing, Construction).
• Tertiary Industries: Providing support services to primary and secondary industries (e.g., Banking, Transport).

• Transport and Communication: Transport facilitates the movement of raw materials to factories and finished goods to consumers (removing hindrance of place). Communication facilitates the exchange of information.
• Banking and Finance: Provides necessary funds for business operations and smooth flow of commerce (removing hindrance of finance).

Profit plays a vital role as:

• Source of Income: It provides a livelihood for the entrepreneur.
• Source of Finance: Retained earnings allow for expansion and growth.
• Indication of Efficiency: It acts as a barometer of the success and stability of the business.
• Reward for Risk Taking: It is the compensation for bearing business uncertainties.

Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events that are beyond control (e.g., change in demand, strikes, natural calamities).

• Natural Causes: Flood, earthquake, etc.
• Human Causes: Dishonesty of employees, strikes, riots.
• Economic Causes: Fluctuations in demand/price, competition.
• Physical Causes: Mechanical defects, technical obsolescence.

The indigenous banking system played a prominent role in lending money and financing domestic and foreign trade in ancient India.

• Financial Instruments (Hundi): Documents like Hundi and Chitti were used to facilitate the transfer of money. They acted as bills of exchange, ensuring payment and credit reliability across regions.
• Indigenous Bankers: Known as Seths, Shroffs, and Mahajans, they lent money and accepted deposits. They financed agriculture and trade, often providing loans for both short-term and long-term requirements.
• Financing Trade: They facilitated the growth of manufacturing (e.g., handlooms) and trade (spices, textiles) by ensuring liquidity in the market.
• Intermediaries: They acted as intermediaries (brokers/commission agents) between producers and consumers, aiding the supply chain.

Definition: Business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits.

Characteristics:

1. Economic Activity: It is undertaken to earn money and acquire wealth.
2. Production or Procurement: Every business enterprise either manufactures goods or acquires them from producers for resale.
3. Sale or Exchange: There must be transfer of goods/services for value.
4. Regular Dealings: One-off transactions (e.g., selling a personal car) do not constitute business; it must be recurrent.
5. Profit Motive: The primary objective is to earn profit to cover costs and grow.
6. Uncertainty of Return: There is always a risk of loss or variable profit; income is not guaranteed.

Basis	Business	Profession	Employment
Mode of establishment	Entrepreneur’s decision & legal formalities.	Membership of professional body & certificate.	Appointment letter & service agreement.
Nature of work	Provision of goods/services to public.	Rendering personalized expert services.	Performing work as per service contract.
Qualification	No minimum qualification.	Specific professional qualification required.	Qualification as prescribed by employer.
Reward	Profit.	Professional Fee.	Salary or Wages.
Risk	High risk (profits uncertain).	Low risk (fee is generally certain).	Little/No risk (fixed pay).

Definition: Industry refers to economic activities concerned with the conversion of resources into useful goods. It includes activities involving mechanical appliances and technical skills.

Types of Industries:

• Primary Industry:
  (a) Extractive: Drawing out products from natural sources (e.g., Mining, Farming, Hunting).
  (b) Genetic: Breeding plants/animals for use (e.g., Poultry farms, Nurseries).
• Secondary Industry:
  (a) Manufacturing: Producing goods (e.g., Textile, Sugar, Steel).
  (b) Construction: Building infrastructure (e.g., Dams, Roads, Buildings).
• Tertiary Industry: Providing support services to primary and secondary industries and trade (e.g., Transport, Banking, Insurance, Warehousing).

Commerce includes two types of activities: Trade and Auxiliaries to Trade.

A. Trade: Refers to buying and selling of goods.
– Internal Trade: Wholesale and Retail within national boundaries.
– External Trade: Import, Export, and Entrepot (Re-export).

B. Auxiliaries to Trade: Activities assisting trade.
– Transport: Removes hindrance of place (moving goods).
– Banking: Removes hindrance of finance (providing capital).
– Insurance: Removes hindrance of risk (protection against loss).
– Warehousing: Removes hindrance of time (storage till demand arises).
– Advertising: Removes hindrance of information (creating awareness).

1. Market Standing: The position of an enterprise in relation to its competitors. A business must aim to stand stronger in the market by offering better products.
2. Innovation: Introduction of new ideas or methods. It is crucial for growth in a competitive world (e.g., new product features or efficient processes).
3. Productivity: Efficiency in using resources. Improving productivity reduces costs and increases profits.
4. Physical and Financial Resources: Acquiring necessary plants, machines, and funds to operate efficiently.
5. Earning Profits: Essential for survival, growth, and as a return on capital employed.

Concept: Business risk is the probability of losses or inadequate profits due to uncertainties. It is an inherent part of every business.

Causes:

• Natural Causes: Natural calamities like floods, earthquakes, or droughts which are beyond human control.
• Human Causes: Strikes, lockouts, theft, negligence by employees, or riots.
• Economic Causes: Changes in market demand, price fluctuations, tax policies, or heavy competition.
• Physical/Other Causes: Mechanical failures, bursting of boilers, or political instability.

• Selection of Line of Business: The first decision is what to produce or sell based on market demand and potential profitability.
• Size of the Firm: Deciding whether to operate on a large scale or small scale depending on capital availability and risk appetite.
• Choice of Form of Ownership: Sole proprietorship, partnership, or company structure based on liability, control needs, and capital.
• Location of Business Enterprise: Availability of raw materials, labor, power, and closeness to the market.
• Financing the Proposition: Estimating capital requirements for fixed assets (land, machinery) and working capital (daily expenses).
• Physical Facilities: Determining machines, equipment, and building required for production.