NCERT Solutions for Class 11 Business Studies Chapter 1 Foundation of Business: Business, Trade and Commerce

NCERT
SOLUTIONS
CLASS - 11th

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Book : Business Studies Ncert Solutions | Chapter - 1 Business Studies

Class : 11th

Subject : Business Studies

Chapter : 1

Chapter Name : Foundation of business

Q1 List any five major commercial cities of ancient India ?

Answer. The major commercial cities of ancient India were :

Pataliputra - It is known as Patna presently. It was a commercial as well as a major centre for
export of stones.

Peshawar - It was an important centre for the export of wool and the import of horses in ancient
times.

Taxila - It served as a link and a major centre on the important land route between India and
Central Asia. It was also a city of commercial and financial banks.

Indraprastha - It was the commercial junction on the royal road where most of the routes leading
to east, west, south and north converged.

Ujjain - The major exports were Agate, carnelian, muslin and mallow cloth. It had trade relations
through the land route with Taxila and Peshawar.

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Q2 What is Hundi?

Answer. Hundi is an instrument of exchange, and was prominent in the subcontinent. It involved
a contract which was a warrant for the payment of money, the promise or order which is
unconditional and capable of change through transfer by valid negotiations.

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Q3 List the major exports and imports in ancient India?

Answer. The major exports in ancient India are as follows - spices, wheat, sugar, indigo, opium,
sesame oil, cotton, parrot, live animals and animal products—hides, skin, furs, horns, tortoise
shells, pearls, turquoise and copper etc.

The major imports in ancient India are as follows -

horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, rubies,
coral, glass, amber, etc.

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Q4 What were the different types of Hundi in use by traders in ancient times ?

Answer. The different types of Hundis used by traders in ancient times were :

Dhani-jog (Darshani) - It was payable to any person - no liability over who received payment.

Sah-jog (Darshani) - It was payable to a specific person, someone ‘respectable’. It was a
liability over who received payment.

Firman-jog (Darshani) - This Hundi was made payable to order.

Dekhan-har (Darshani) - This Hundi was payable to the presenter or bearer.

Dhani-jog (Muddati) - It was payable to any person -jo liability over who received payment, but
payment over a fixed term.

Firman-jog (Muddati) - This Hundi is made payable to order following a fixed term.

Jokhmi (Muddati) - This Hundi is drawn against dispatched goods. If goods are lost in transit,
the drawer or holder bears the costs, and the Drawee carries no liability.

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Q5 What do you understand by maritime trade?

Answer. The maritime trade is a trade through sea routes. It involves the transportation of goods
from one place to another via sea routes in ships and vessels.

The maritime routes linked the east and the west by sea and were used to trade goods,
especially spices and was also known as 'spice route'.

Important maritime routes of India in ancient times were Malabar Coast, Calicut, Coromandel
Coast etc.

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Q6 State the different types of economic activities?

Answer. Economic activities are divided into three categories, namely business, profession and
employment.

Business - Business refers to the trading of goods and services on a regular basis. The main
motive of these activities is to earn profits as income.

Profession - Profession refers to the occupation which involves applying the skills and in depth
knowledge of a particular field. It may include services offered by professionals like the doctor,
engineer etc.

Employment - Employment refers to the activity in which the person is hired by an organisation
to work on a regular basis in return of wages or salary paid to him against the services.

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Q7 Why is business considered as economic activity?

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Answer. Business is considered to be an economic activity because it is carried out with the
motive of earning money or profits or livelihood. This is not done out of love, affection, sympathy
or any other emotion. A business can be carried out on small as well as large scale.

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Q8 State the meaning of business.

Answer. The term 'Business' is derived from the word 'busy'. However, business refers to an
occupation in which people regularly engage in activities related to purchase, production or sale
of goods and services with a motive of earning profits and to satisfy the needs of the people.

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Q9 How would you classify business activities?

Answer. Business activities are classified into two categories namely Industry and commerce.

Industry : Industry refers to those economic activities, which are connected with the conversion
of resources into useful goods. This activity is undertaken with the help of relevant technical
skills and mechanical appliances.

For example, cotton textile industry refers to all manufacturing units producing textile goods
from cotton.

Commerce : Commerce includes two types of activities, (i) trade and (ii) auxiliaries to trade.
Trade is the buying and selling of goods. 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.
These include transportation, banking, insurance, communication, advertising, etc.

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Q10 What are the various types of industries?

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Answer. Industries are broadly divided into three categories namely primary, secondary and
tertiary.

(i) Primary industries : It includes all those activities which are concerned with the
extraction and production of natural resources and reproduction and development of
living organisms, plants, etc. These are further divided into two namely Extractive and
Genetic industries.

(ii) Secondary industries: These are concerned with using materials, which have already
been extracted at the primary state. For example, mining of iron ore is a primary
industry, but manufacturing of steel by way of further processing of raw iron is a
secondary industry. These are further divided into Manufacturing industries and
Construction industries.

(iii) Tertiary industries: These are concerned with providing support services to primary
and secondary industries as well as activities relating to trade. These industries provide
services. It includes transport, banking, insurance, warehousing, communication,
packaging and advertising.

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Q11 Explain any two business activities which are 'auxiliaries to trade' ?

Answer. Transport and Communication : Production of goods are confined to certain places and
in particular locations. For instance, tea is mainly produced in Assam, just is produced in West
Bengal and so on. Though the goods are produced here but may not necessarily be consumed
in the same place. It is required in various other places. For this purpose it has to be moved
from the place of creation to the place of utility. This can only be done with the help of
transportation. Besides transport facilities, communication facilities are also needed in order to
exchange information among the producers, traders and consumers. Thus, postal services and
telephone facilities may also be considered as auxiliaries to business activities or the supporting
business activities.

Banking and Finance : Finance is the blood of business. It is impossible to carry out any
business activity without finance. It is used for acquiring assets, purchasing raw materials and
meeting day to day expenses of the business. Therefore, this requirement of the business is
fulfilled by the banks in the form of short term and long term loans, credit facilities, advances,
etc.

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Q12 What is the role of profit in business ?

Answer. Profit is regarded as the most important objective of business. It is one of the basic
requirements of the business in the long run. This acts as a motivating factor for the expansion
of the business. It is excess of revenue over cost.

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Q13 What is business risk? What is its nature?

Answer. The term business risks refers to the possibility of inadequate profits or even losses
due to uncertainties or unexpected events.

For example, the demands of a particular good may decline due to a change in the taste and
preference of people. It may also change due to the prices of the complementary goods or may
also change due to the emergence of new products into the market. Changes in the fashion
sense of people also changes the demands of the people.

The nature of business risks are :

1) Business risks arise due to uncertainties.
2) Risk is an essential part of every business.
3) The nature and size of the business are the two main determinants of the degree of risk.
4) Profit is the reward for task taking.

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Q1 Discuss the development of indigenous banking system in Indian subcontinent.

Answer. With various departments, the economic life of people progressed gradually. Money
served as a medium of exchange, the introduction of metallic money and it's accelerated the
economic activities and it's growth.

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Indigenous banking system played a very important role in lending money and financing
domestic and foreign trade with currency and letters of credit. When banking services were
developed, then people started depositing their precious metals with lending individuals
functioning as bankers or Seths, and money became an instrument for supplying the
manufacturers with a means of producing more goods.

Documents such as Hundi and Chitti were used for carrying out transactions. In this money
passed from hand to hand. Hundi was very prominent as an instrument of exchange in the
subcontinent.

The intermediaries also played an important role in the promotion of trade. They provided
financial security to the manufacturers by assuming responsibility for the risks involved,
especially in foreign trade.

The institution of Jagat Seths also developed and exercised great influence during the days of
Mughal period and the days of East India Company. The emergence of credit transactions and
availability of loans and advances enhanced commercial operations. The balance of trade was
favourable in the Indian subcontinent and the indigenous banking system benefitted the
manufacturers, traders, and merchants with funds for development and expansion.

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Q2 Define business. Describe its important characteristics.

Answer. Business is derived from the term 'busy'. Business refers to the trading of goods and
services on a regular basis. The main motive of these activities is to earn profits as income. The
activities may consist of production or purchase of goods for sale, or exchange of goods or
supply of services to satisfy the needs of other people.

Characteristics of business are as follows :

(i) An economic activity : A business is an economic activity which is undertaken in order to earn
money income and profits. It isn't done for charitable purposes, love, affection, sympathy or any
emotion. It is undertaken by an individual or by a group of individuals.

(ii) Production or procurement of goods and services : In order to fulfill the needs of people
goods must be either produced or procured by business enterprises. Thus the business
enterprise may produce the goods or it may procure them from any other producer in order to
sell them to the consumers. These goods can be consumer goods or capital goods.

(iii) Sale or exchange of goods and services : Each and every business involves transfer or
exchange of goods and services for value either directly or indirectly. Goods purchased for
personal consumption don't constitute a business. Thus goods must be purchased for resale

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purposes. Cooking food at home for the family is not business, but cooking food and selling it to
others in a restaurant is a business.

(iv) Dealings in goods and services on a regular basis : Business involves dealings in goods or
services on a regular basis. If an individual or any institution is selling goods or services only
once or twice then it doesn't constitute business.

For example, if a person sells his/her personal car even at a profit, it will not be considered as a
business activity. But if he/she sells cars regularly either through a shop or from his/her
showroom, it will be regarded as a business activity.

(v) Profit earning : One of the main purposes of business is to earn income by way of profit. No
business can survive for long without profit. Thus businessmen aim at maximizing the profits by
increasing the sales or reducing costs.

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Q3 Compare business with profession and employment.

Answer.

Basis Business Profession Employment

1. Mode of Entrepreneur’s Membership of a Appointment

establishment decision and other professional body letter and service

legal formalities, if and certificate of agreement

necessary practice

2. Nature of Provision of goods Rendering of Performing work

work and services to the personalised, as per service

public expert services contract or rules

of service

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3. Qualification No minimum Qualifications, Qualification and

qualification is expertise and training as

necessary training in specific prescribed by the

field as prescribed employer

by the professional

body is a must.

4. Reward or Profit earned Professional fee Salary or wages

return

5. Capital Capital investment Limited capital No capital

investment required as per size needed for required

and nature of establishment

6. Risk Profits are uncertain Fee is generally Fixed and regular

and irregular; risk is regular and pay; no or little

present certain; some risk risk

7. Transfer of Transfer possible Not possible Not possible

interest with some
formalities

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8. Example Shop, factory Legal, medical Jobs in banks,

profession, insurance

chartered companies,

accountancy government

departments

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Q4 Define Industry. Explain various types of industries giving examples.

Answer. Industry refers to a group of economic activities, which are connected with the
conversion of resources into useful goods. Industry refers to a group of activities in which
mechanical appliances and technical skills are involved. Activities pertaining to the production or
procurement of goods and services are categorised under industries.

For example, the Iron and Steel industry refers to all manufacturing units producing goods from
Raw Iron. Industry can be classified into the following :

(i) Primary industries : Primary industries are those industries which are related to the extraction
or production of natural resources or reproduction and rearing or development of living beings,
plants etc. These are further divided into two categories :

(a) Extractive industries: These industries are involved in extraction or drawing products from
natural sources. Extractive industries supply the basic raw materials that are mostly products of
geographical or natural environment. The final output of these industries is used as raw
materials by manufacturing industries. Important extractive industries include farming, mining,
lumbering, hunting and fishing operations.

(b) Genetic industries : These are the industries which are engaged in breeding plants and
animals for their use in further reproduction. The typical example of this type of industry is the
seed and nursery companies. The cattle breeding farms, poultry farms, and fish hatchery are
also genetic industries.

(ii) Secondary industries : These are concerned with using materials, which have already been
extracted at the primary state. These industries process such materials to produce goods for
final consumption or for further processing by other industrial units.

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For example, mining of iron ore is a primary industry, but manufacturing of steel by way of
further processing of raw irons is a secondary industry. Secondary industries may be further
divided as follows:

(a) Manufacturing industries : These industries are engaged in producing goods through
processing of raw materials and, thus, creating form utilities. They bring out diverse finished
products, that we consume, or use through the conversion of raw materials or partly finished
materials in their manufacturing operations.

(b) Construction industries : These are the industries that are involved in the construction of
buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural
skills are an important part in construction industries.

(iii) Tertiary industries : These are concerned with providing support services to primary and
secondary industries as well as activities relating to trade. These industries provide service
facilities. 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.

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Q5 Describe the activities relating to commerce.

Answer. Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods.
It helps in making the goods produced available to the consumers or users. These days goods
are produced on a large scale and it is difficult for producers to themselves reach out to
individual buyers for selling their products.

Auxiliaries to Trade Activities which are meant for assisting trade are known as auxiliaries to
trade. These activities are generally referred to as services because these are in the nature of
facilitating the activities relating to industry and trade. Transport, banking, insurance,
warehousing, and advertising are regarded as auxiliaries to trade, i.e., activities playing a
supportive role. In fact, these activities support not only trade, but also industry and, hence, the
entire business activity. Auxiliaries to trade are briefly discussed below:

(i) Transport and Communication : Production of goods generally takes place in particular
locations. For instance, tea is mainly produced in Assam; cotton in Gujarat and Maharashtra;
jute in West Bengal and Odisha; sugar in U.P., Bihar and Maharashtra and so on. But these
goods are required for consumption in different parts of the country. The obstacle of place is
removed by transport through road, rail or coastal shipping

(ii) Banking and Finance : Business activities cannot be undertaken unless funds are available
for acquiring assets, purchasing raw materials and meeting other expenses. Necessary funds

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can be obtained by businessmen from a bank. Thus, banking helps business activities to
overcome the problem of finance.

(iii) Insurance : Business involves various types of risks. Factory building, machinery, furniture,
etc, must be protected against fire, theft and other risks. Material and goods help in stock or in
transit are subject to the risk of loss or damage. Employees are also required to be protected
against the risks of accidents and occupational hazards.

(iv) Warehousing : Usually, goods are not sold or consumed immediately after production. They
are held in stock to make them available as and when required. Special arrangements must be
made for the storage of goods to prevent loss or damage. Warehousing helps business firms to
overcome the problem of storage and facilitates the availability of goods when needed. Prices
are, thereby, maintained at a reasonable level through continuous supply of goods.

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Q6 Explain any five objectives of business.

Answer. Objectives are needed in every area where performance and results affect the survival
and prosperity of business. Some of these areas are described as follows.

(i) Market standing : Market standing refers to the position of an enterprise in relation to its
competitors. A business enterprise must aim at standing on stronger footing in terms of offering
competitive products to its customers and serving them to their satisfaction.

(ii) Innovation : Innovation is the introduction of new ideas or using new methods in the way
something is done or made. There are two kinds of innovation in every business i.e., (i)
innovation in product or services; and (ii) innovation in various skills and activities needed to
supply products and services. No business enterprise can flourish in a competitive world without
innovation. Therefore, innovation becomes an important objective.

(iii) Productivity : Productivity is ascertained by comparing sure value of output with the value of
inputs. It is used as a measure of efficiency. In order to ensure continuous survival and
progress, every enterprise must aim at greater productivity through the best use of available
resources.

(iv) Physical and financial resources : Any business requires physical resources, like plants,
machines, offices, etc., and financial resources, i.e., funds to be able to produce and supply
goods and services to its customers. The business enterprise must aim at acquiring these
resources according to their requirements and use them efficiently.

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(v) 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 so important for its survival and growth.

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Q7 Explain the concept of business risk and its causes.

Answer. The term ‘business risks’ refers to the possibility of inadequate profits or even losses
due to uncertainties or unexpected events or even shortage of working capital requirements..
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 or may be due
to the fluctuations in the prices of complementary goods.

Lower demand results in long sales and profits. In another situation, the shortage of raw
materials in the market may shoot up its price. The firm using these raw materials will have to
pay more for buying them. As a result, the cost of production may increase which, in turn, may
reduce profits. Business enterprises constantly face two types of risk : speculative and pure.
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.

Cause of Business Risks :

Business risks arise due to a variety of causes, which are classified as follows :

(i) Natural causes : Human beings have little control over natural calamities, like flood,
earthquake, lightning, heavy rains, famine, etc. property and income in business.

(ii) Human causes : Human causes include such unexpected events, like dishonesty,
carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots,
management inefficiency, etc.

(iii) Economic causes : These include uncertainties relating to demand for goods, competition,
price, collection of dues from customers, change of technology or method of production, etc.
Financial problems, like rise in interest rate for borrowing, levy of higher taxes, etc., also come
under these types of causes as they result in higher unexpected cost of operation or business.

(iv) Other causes : These are unforeseen events, like political disturbances, mechanical failures,
such as the bursting of boilers, fluctuations in exchange rates, etc, which lead to the possibility
of business risks.

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Q8 What factors are to be considered while starting a business? Explain.

Answer. Some of the basic factors, which must be considered by anybody who is to start the
business are as follows.

(i) Selection of line business: The first thing that an entrepreneur must decide is the nature and
type of business to be undertaken. He/she will most probably like to enter the branch of industry
and commerce, which has the possibility of greater amount of profits. The decision will be
influenced by the customer requirements in the market and also the kind of technical knowledge
and interest the entrepreneur has for producing a particular product.

(ii) Size of the firm : The size of the firm or scale of its operation is another important decision to
be taken at the start of the business. Some factors favour a large size, whereas others tend to
restrict the scale of operation. If the entrepreneur is confident that the demand for the proposed
product is likely to be good over time and he/she can arrange the necessary capital for
business, he/she will start the operation at a large scale. If the market conditions are uncertain
and risks are high, a small size business would be a better choice.

(iii) Choice of form of ownership : With respect to ownership, the business organisation may
take the form of a sole proprietorship, partnership, or a joint stock company. Each form has its
own merits and demerits. The choice of the suitable form of ownership will depend on such
factors as the line of business, capital requirements.

(iv) 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. Any mistake in this regard can result
in high cost of production, inconvenience in getting, right kind of production inputs or serving the
customers in the best possible way. Availability of raw materials and labour; power supply and
services, like banking, transportation, communication, warehousing, etc, are important factors
while making a choice of location.

(v) Financing the proposition : Financing is concerned with providing the necessary capital for
starting, as well as, for continuing the proposed business. Capital is required for investment in
fixed assets, like land, building, machinery and equipment and in current assets, like raw
materials, books, debts, stock of finished goods, etc. Capital is also required for meeting
day-to-day expenses. Proper financial planning must be done to determine (a) the requirement
of capital, (b) source from where the capital will be raised and (c) the best ways of utilising the
capital in the firm.

(vi) Physical facilities : Availability of physical facilities, including machines and equipment,
building and supportive services is an important factor to be considered at the start of the

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business. The decision relating to this factor will depend on the nature and size of business,
availability of funds and the process of production.

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