In your day-to-day life you may be engaged in several activities. However, when some one asks you as to what you want to become in your life or what you want to do in future, your answer may be – “I want to join a suitable job or I want to become a doctor, an engineer, a dancer or a musician”, or you may say, “I want to do my own business”. But why do you want to do any of such activities? Obviously, it is mainly to earn your livelihood. Broadly speaking, every human activity in which one is engaged for the purpose of earning one’s livelihood is known as economic activity. In this lesson we shall learn about all such activities, their categorisation and some other related aspects.
After seen this video, you will be able to:
- define human activities;
- classify human activities as economic and non-economic activities;
- explain the role of profit in business;
- explain the meaning and characteristics of different categories of economic activities;
- explain the concept of business and distinguish it from profession and employment;
- describe the objectives and importance of business in modern society; and
- identify different types of business activities.
Every human being is engaged in one activity or the other. It may be cultivating land, preparing food, playing football, reading storybooks, studying in a school, teaching in a college, working in an office, jogging in the park and so on. If you try to ascertain as to why individuals engage themselves in one activity or the other, you will find that by doing such activities they are trying to satisfy some of their needs or wants. All these activities which human beings undertake to satisfy their needs or wants are called human activities.
The human activities that are undertaken with an objective to earn money or livelihood are called economic activities. Whereas the other types of activities that are undertaken to derive self-satisfaction, are called non-economic activities. A farmer growing crops, a worker working in a factory for wage/salary, a businessman engaged in buying and selling of goods are examples of economic activities. While activities like meditation, engaging in sports for physical fitness, listening to music, providing relief to flood victims etc., are examples of non-economic activities.
CLASSIFICATION OF ECONOMIC ACTIVITIES
Economic activity can be a one-shot affair or a continuous one. For example, you know how to stitch clothes and one day you stitch a shirt for your friend and he pays some money to you. Of course, this is an economic activity as you have some monetary gain but it is a one-shot affair. But, if you start stitching shirts on a continuous basis and charge money for that, you are said to be engaged in some continuous or regular economic activity. It may be noted that by getting themselves engaged regularly in a particular economic activity people try to earn their livelihood. So, the activities in which individuals engage themselves on a regular basis and earn their livelihood are known as their ‘occupations’.
In fact everyone is engaged in one occupation or the other, and these can be broadly categorised as –
You are aware of doctors. What are they and what do they do? They are basically individuals who have a special knowledge and training to examine the patients, find out the ailment, if any, and then treat them to be cured from such ailment. And, for doing all these they charge a fee from patients. Similarly, we have Chartered Accountants who specialise in matters related to accounts, taxes etc. and help people and organisations for such jobs for a fee. If we look further, we find Engineers, Architects, Film-stars, Dancers, Artists and many others engaged in their own field having specialised knowledge and training. They are all known as professionals and the activities they are engaged in are called profession.
In order to gain clarity on the concept of a profession, let us look at its basic features which can be summarised as follows:
(a) Profession is an occupation for which the individual has to acquire a special knowledge and skill.
(b) The money they get for providing such a service is usually known as ‘fee’.
(c) Most of the professionals are regulated by a professional body, which frames the code of conduct to be followed by the member professionals. For example, Chartered Accountants in India are regulated by a professional body known as Institutes of Chartered Accountants of India, Cricketers by International Cricket Council (ICC), and so on.
(d) Professionals acquire the specialised knowledge mostly from colleges, universities or specialised institutes. In some cases, individuals also acquire such knowledge and skill through training or coaching by an expert in the same field, say for example, dancers and musicians, etc.
(e) Professionals usually work on their own and get a fee for their services and termed as those in practice. However, some of them may work in organisations as employees or consultants.
(f) The primary objective of every profession is to provide service though they may charge a fee. They should not exploit the people using their knowledge of expertise.
You have seen people going regularly to offices, factories, firms etc. for work. These are individuals who are engaged by organisations or individuals to work for them in return for a wage or salary. They are said to be in employment. Thus, we find a postman is in employment in the department of posts to deliver letters. Here the department is called the employer and the postman is the employee. The postman works on the basis of certain terms and conditions and gets a monthly salary in return. The main features of employment are:
(a) It is an occupation where a person (called employee) is to work for another (called employer).
(b) There are certain terms and conditions of work like hours of work (how many hours a day), duration of work (how many days or hours in a week or month etc.), leave facility, salary/wages, place of work etc.
(c) The employees get salary (normally paid on a monthly basis) or wage (normally paid on daily/weekly basis) in return of their work. This amount is normally predetermined, mutually agreed upon and may increase over time.
(d) Legally the employer-employee relationship is based on a contract and any deviation from any side permits the other party to take legal recourse.
(e) There are jobs for which no technical education or specialised skill is required for employment. But, for skilled jobs, specialised jobs and technical jobs, a certain level of basic/technical education is required.
(f) The main purpose behind employment is to secure assured income through wages and salaries.
You must have heard about Tata Companies. They manufacture so many things from salt to trucks and buses and sell these to individuals like you and me. In the process, they earn a profit. Look at a shopkeeper nearby. What does he do? He buys products in bulk and sells us in small quantities. He also earns some profit in the process. Similarly, the cable TV operator provides us a connection at a price so that we watch various channels on our television set. In this process the cable TV operator earns a profit. All of them are said to be engaged in business and are called businessmen. They all perform their activities regularly to earn profit. Thus, the term ‘business’ refers to human activities which involve production or exchange of goods and services regularly with the object of earning profit.
(a) It is an occupation where a person is engaged in manufacturing or buying and selling of goods and services. The goods may be consumer goods or capital goods. Similarly the services may be in the form of transportation, banking, insurance etc.
(b) The activities must be carried on regularly. A single transaction is usually not treated as a business. For example, if a person sells his old car at a profit, it is not treated as a business activity. However, if he is engaged in the activity of buying old cars and selling them on a regular basis, he shall be treated as engaged in business activity.
(c) The sole objective of business is to earn profit. It is essential for the survival of business. Of course, it is through provision of some goods or some services.
(d) Every business requires some investment in cash or kind or both. It is usually provided by the owner or is borrowed by him at his own risk.
(e) The earnings are always uncertain, because the future is unpredictable and a businessman has no control over certain factors that affect his earnings. Thus, every business involves an element of risk and the same is borne by the businessman, the owner.
IMPORTANCE OF BUSINESS
Business is an integral part of modern society. It is an organised and systematic activity for earning profit. It is concerned with activities of people working towards a common economic goal. Modern society cannot exist without business. The importance of business can be described as follows:
(a) Business improves the standard of living of the people by providing better quality and large variety of goods and services at the right time and at the right place.
(b) It provides opportunities to work and earn a livelihood. Thus, it generates employment in the country, which in turn reduces poverty.
(c) It utilises the scarce resources of the nation and facilitates mass production of goods and services.
(d) It improves national image by producing and exporting quality goods and services to foreign countries. By participating in international trade fairs and exhibitions it also demonstrates the progress and achievements of its own country to the outside world.
(e) It enables the people of a country to use quality goods of international standard. This is possible by way of importing goods from foreign countries or by producing quality goods in the country by applying modern methods of production.
(f) It gives better return to the investors on their capital investment and also provides opportunities to grow and expand the business.
(g) It promotes social interest by providing tourist services, sponsoring cultural programmes, trade shows etc. in the country, which enable people of different parts of the country to exchange their culture, traditions and practices. Thus, it promotes national integration.
(h) It also facilitates exchange of culture among the people of different nations and thus, maintains international harmony and peace.
(i) It helps in the development of science and technology. It spends large amount of money on research and development in search of new products and services. Hence a number of innovative products and services are developed through industrial research.
OBJECTIVES OF BUSINESS
Business objectives are something, which a business organisation wants to achieve or accomplish over a specified period of time. It is generally believed that a business has a single objective, that is, to make profit and safeguard the interests of its owners. However, no business can ignore the interests of its employees, customers as well as the interest of society as a whole. Business objectives also need to be aimed at contributing to national goals and aspirations as well as towards international wellbeing. Thus, the objectives of business may be classified as –
(a) Economic objectives
(b) Social objectives
(c) Human objectives
(d) National objectives
(e) Global objectives
Role of Profit in Business
1. Survival : Profit helps an organization to replace old assets and increases the capacity of an organization to survive.
2. Future Growth and Expansion : Extra profit earned can be utilized for expansion purpose. Entry in new areas helps an enterprise to grow.
3. Incentive : Profit is an incentive for businessmen who put hard work. Profit motivates the businessmen to put maximum efforts.
4. Prestige : Profit making organizations can afford to give higher wages/salaries and other facilities to their employees. This can retain employees and attract highly competent persons to join the enterprise. So profit making concern enjoys goodwill in the society.
5. Achievement of Goals : Only a profit making concern can achieve the goals of an enterprise because achievement of economic objectives require expenditure.
6. Measure of Efficiency : The success of an organization can be evaluated by looking at its profit. So profit is an index of success in business. It measures the efficiency of business.
7. Means of Livelihood to Businessmen : Profit is a regular income to the family of business persons.
Business is full of uncertainties. Uncertainties can be of different forms like loss due to change in fashion; fall in market price; goods produced may be destroyed by fire, storm, cyclone, theft etc. Thus, while running a business enterprise, there is an element of risk. Business risk means chance of loss due to uncertain events in future.
Nature of Business Risk
- Uncertainty : Business risks is due to uncertainty of the future course of action. Natural clamaties such as flood, earthquake etc. result is loss. Loss may also arise due to human causes like strike, lockouts, accidents, theft, bad-debts etc. There are other uncertainties such as competition, technological changes, price fall etc
- Profit is the Reward for Risk : A business concern which is willing to take risk earns handsome profits. Heavy risk results in higher profits.
- Difficult to Measure : A businessman may anticipate some risks. He cannot predict all the risks which will occur in future. Therefore, risk cannot be measured accurately.
- Essential Element of Business : Business activities cannot be conducted without some element of risk. Risk bearing is an essential element of business.
- Variability : According to the nature and size of business, the degree of risk varies. If the amount invested is high, there will be high degree of risk. The degree of risk varies with time and competition.
Causes of Business Risks
1. Natural Causes : Fire, flood, storm, cyclone, earthquake, famine, lightning, snowfall, tide etc. result in loss of life, property and income. Therefore, natural causes are beyond the control of business.
2. Economic Causes : It refers to change in market conditions. Economic causes can be in the form of fluctuation in demand, fluctuation in price, availability of cheap substitutes, competing business firms etc.
3. Political Causes : Fall of government may change license policy and tax policy. This may result in loss to the business. Import and export restrictions, high taxes, rise in interest rate on borrowings etc. may cause loss to the business. Political causes refer to changes in government policies and laws.
4. Human Causes : Inefficient management and carelessness of employees may result in loss. Workers may damage machines. They may involve in strike, lockout etc. which may also result in loss. If the management fail in estimating demand for products, loss may arise. Uncertainties caused by human actions e.g. forgery, misappropriation of cash, theft of goods, riots, wars, etc. can also result in loss.
5. Physical and Technical Causes : Change in technology may make the machines obsolete before their expected life. Mechanical failures arise due to leakage of gas, bursting of a boiler etc. Value of assets may be reduced due to loss in weight, vaporisation etc. Another kind of physical cause is the loss of goods in transit.
CLASSIFICATION OF BUSINESS ACTIVITIES
Let’s look around and find out the various types of business activities that usually take place in an economy. Some of these are:
- extraction of oil, natural gas or minerals;
- manufacturing of commodities;
- buying of goods from one place/country and selling it at different place/country;
- construction of buildings, roads, and bridges etc.
- providing services like ticketing, warehousing, transportation, banking, insurance etc.
When we analyse the above business activities we find that most business activities are concerned with production and/or processing of goods and services or distribution of goods and services. The former is known as ‘Industry’ and the latter as ‘Commerce’. So we can classify business as Industry and Commerce. Let us now know details about these two categories.
Industry primarily refers to all such business activities concerned with production/raising or processing of goods and services. It processes raw materials or semi-finished goods into finished goods. Extracting raw materials from earth’s surface, manufacturing goods and commodities, producing crops, fish, flowers, etc., constructing buildings, dams, roads etc. are all examples of industry. These activities are called industrial activities and the units engaged in these activities are known as industrial enterprises. However in a broader sense, provision of services like banking, insurance, transport also form part of industries known as tertiary industries.
Classification of Industries
- Primary Industries : Primary industries refer to the activities of extraction of natural resources like coal, oil, minerals etc. and reproduction and development of living organisms like plants and animals etc. Primary industries can be categorised as extractive and genetic industries. You must have heard about ONGC – it is a company that extracts oil and natural gas from earth. Similarly we have farmers growing crops, business houses engaged in extracting raw materials/minerals from earth (coal mines, iron-ore mines etc.), extracting materials from forest for further processing (like collecting natural honey, timber etc.), extracting items from sea/ river (like fish, crab, prawn, sea foods etc.). All these are examples of extractive industries.
- Secondary Industries : The products of primary industries are normally used as raw materials to produce a variety of finished goods. And it is the secondary industry that uses the products of primary industry as its raw materials. The activities of secondary industries may be of manufacturing or construction. Manufacturing industries are engaged in producing finished goods out of raw materials or semifinished products. For example, cotton is used to produce textile, timber to produce furniture, bauxite to produce alumina. The industries engaged in erection of buildings, dams, bridges, roadways, railways, canals, tunnels etc. are known as construction industries. They make use of the products of other industries and construct different types of structures as per the requirements of the customers.
- Tertiary Industries : These industries are basically concerned with generating or processing of various services and facilitate the functioning of primary industries and secondary industries as well as activities of trade. These include service industries like banking, insurance, transport etc. Film industry which provides entertainment to the individuals, produces films; tourism industry which provides services to the individual by facilitating their travel, booking of tickets and hotel rooms etc. are also included in this category.
Manufacturing industries may be divided further into the following categories:
- Analytical Industries manufacture different types of products by analysing and separating different elements from the same product. Petrol, diesel, kerosene, lubricating oil etc. are produced from the crude oil in oil refinery industry.
- Synthetic Industries put together various ingredients and manufacture a new product. For instance, soap is produced by combining potassium carbonate and vegetable oil. Similarly, cement is produced by using limestone, coal and other chemicals.
- Processing Industries are those in which raw materials are processed through successive stages to get the final products. Textile, sugar and paper are the examples of processing industry.
- Assembling Industries put together various manufactured products and make a new product as in the case of car, scooter, bicycle, radio and television etc
All goods and services produced are to be made available by those who need them. This involves a number of additional activities. For example when somebody produces bread, he has to make it available at convenient locations at right time. This involves activities like making people aware about the product, storing the product at right places, arranging retail outlets, packaging the product, transportation of the product, selling the product and so on. All these activities taken together are known as Commerce. It provides the necessary link between producers and consumers of goods and services and facilitates the purchase and sale of goods and services. In fact, it performs all functions, that are essential for maintaining a smooth and uninterrupted flow of goods and services to the customers. Thus, commerce involves:
- Buying and selling of goods and services
- Activities essential for the smooth and uninterrupted flow of goods and services from the point of production to the point of consumption.
The first activity, that is, purchase and sale of goods and services is termed as Trade, and the second activity i.e., the activities that ensure smooth flow of goods to customers are known as ‘Auxiliaries to trade’ or ‘Aids to trade’. Thus, commerce is classified as:
- Auxiliaries to trade
Trade is an integral part of commerce. It simply refers to sale, transfer or exchange of goods and services. It helps in making the goods and services available to ultimate consumers. The manufacturers of goods who produce in bulk or large quantity generally find it very difficult to sell those goods directly to the consumers. It may be noted that the wholesalers as well as the grocery shop owners are said to be engaged in trading. Thus, the features of trade can be summed up as follows:
- It involves actual buying and selling of goods
- It refers to procuring goods from one place/person to sell it to another person or at another place
- Traders, also known as middlemen facilitate the distribution of goods
- Trading helps in equalising demand and supply. For example, the state of Punjab may be producing plenty of rice without much demand for it in its own state. Traders buy rice from Punjab and make it available to states like Orissa and West Bengal where there is a great demand for rice. Thus, the demand and supply ratio is maintained
Aids/Auxiliaries to Trade
To facilitate buying and selling of goods (trade) a variety of other activities are required to be performed. These include, transport of goods, storage of goods, financial transactions, insurance of goods etc. For example, when a company at Chennai buys goods from Delhi or imports it from Singapore, it needs to undertake most of the following activities, in addition to buying and selling of goods. These activities are –
- Carrying of goods physically from Delhi/Singapore to Chennai (called Transportation)
- Systematic storage of goods once the goods are received at Chennai (called Warehousing).
- Arranging money and making payments to the seller through banks and other sources (called Banking).
- Covering risk of damage/loss of goods in transit from Delhi/Singapore or while it is in store (called Insurance)
- Exchange of information with each other through postal and telecom services (called Communication).
- Advertising : In today’s competitive market, it is not possible for a businessman to sit and wait for customer after investing heavily in business. To attract customers towards his product, a producer has to provide full knowledge of his product to the customer. Advertising does this properly. Advertisement enhances the knowledge of the customer about the products available in the market and with the help of this knowledge, a customer takes decision about the purchase of the product. In this way, advertisement enhances the knowledge of the customers and eliminates the hindrance of information.
All the above activities help in facilitating the trading activities or providing support to the trading activities. That is why these are called auxiliaries to trade. So auxiliaries to trade refer to those activities that facilitate trade. These activities not only facilitate the trading activities, but also provide the necessary support to the entire business in its successful functioning. Hence, these are also called support services of business. In the next lesson we shall discuss about all these support services of business in detail.