Concept and Classification of Business

Introduction

Human beings engage in various activities to satisfy their needs and desires. These activities can be broadly classified into economic and non-economic activities.

• Economic Activities: Activities undertaken with the objective of earning a livelihood or profit. Examples include producing goods, selling goods, providing services, working in a factory, practicing law, etc.
• Non-economic Activities: Activities undertaken out of love, affection, sentiment, or for social or religious obligations, without any monetary consideration. Examples include a mother cooking for her family, participating in religious ceremonies, social service, hobbies, etc.

Business is a major category of economic activity. It involves the production and/or distribution of goods and services with the primary motive of earning profit.

Role Of Business In The Development Of Economy

Business plays a crucial and dynamic role in the economic development of a country like India.

1. Generation of Employment

Businesses create jobs, providing opportunities for people to earn a living and contribute to the economy. This leads to reduced unemployment and improved living standards.

2. Generation of Income and Wealth

Businesses generate income through sales and profits. This wealth is distributed among owners, employees (wages/salaries), creditors (interest), and the government (taxes). Increased income leads to higher purchasing power, boosting demand and economic growth.

3. Contribution to Gross Domestic Product (GDP)

The goods and services produced by businesses contribute significantly to the nation's GDP, which is a key indicator of economic health.

4. Innovation and Technological Advancement

Businesses constantly seek new and improved ways of producing and distributing goods and services. This drives innovation, technological advancement, and increased productivity in the economy.

5. Provision of Goods and Services

Businesses cater to the diverse needs and wants of the population by producing and making available a wide variety of goods and services, improving the quality of life.

6. Contribution to Government Revenue

Businesses contribute to government revenue through various taxes like income tax, corporate tax, Goods and Services Tax (GST), etc. This revenue is used by the government for public welfare and infrastructure development.

7. Development of Infrastructure

Large businesses often contribute to the development of physical and social infrastructure like roads, power, housing, education, and healthcare facilities, especially in areas where they operate.

In summary, business is the engine of economic growth, driving progress, prosperity, and improved living standards.

Concept Of Business

A Business is defined as an economic activity involving the production or purchase and sale of goods and services with the primary motive of earning profit by satisfying human needs in society.

It is an organised effort by individuals or groups to produce and sell goods and services in a market.

Characteristics Of Business Activities

Based on the concept, the following are the key characteristics of business activities:

1. An Economic Activity

Business is an economic activity because it is undertaken with the objective of earning money or livelihood. It involves the production, exchange, and distribution of goods and services.

2. Production or Procurement of Goods and Services

Before goods are offered for sale, they must be produced or procured. Business enterprises either manufacture the goods they deal in or purchase them from producers to sell to consumers.

• Goods: Tangible items like furniture, clothes, books, mobile phones, etc.
• Services: Intangible benefits or facilities like transportation, banking, insurance, warehousing, communication, etc.

3. Sale or Exchange of Goods and Services

Business involves the transfer or exchange of goods and services for value (usually money). Production is not business unless it is meant for sale or exchange.

4. Dealing in Goods and Services on a Regular Basis

A single transaction of sale or purchase does not constitute business. Business involves dealing in goods and services on a continuous or recurring basis. For example, selling your old car at a profit is not business, but if you regularly buy and sell cars for profit, it is a business activity.

5. Profit Earning

The primary motive of any business activity is to earn profit. Profit is essential for the survival, growth, and expansion of a business. While service to society is also an objective, it is generally secondary to profit earning in most businesses.

6. Uncertainty of Return (Risk Element)

There is always an element of risk and uncertainty in business. The businessman invests money with the expectation of earning profit, but there is no guarantee. Factors like changes in consumer tastes, competition, government policies, technology, etc., can lead to losses instead of profits.

7. Creation of Utility

Business activities create various types of utility:

• Form Utility: By changing the form of raw materials into finished goods (e.g., timber into furniture).
• Place Utility: By transporting goods from places of production to places of consumption.
• Time Utility: By storing goods and making them available when needed (warehousing).
• Possession Utility: By transferring ownership of goods from seller to buyer.

Comparison Of Business, Profession And Employment

Business is one form of economic activity. Other forms include profession and employment. Here's a comparison:

Classification Of Business Activities

Business activities can be classified into two broad categories:

1. Industry
2. Commerce

Industry

Industry refers to economic activities which are connected with the production of goods, processing of materials, or rearing and breeding of animals. Industry creates form utility by converting raw materials into finished products.

Industries can be classified into the following types:

1. Primary Industries

These are concerned with extracting and producing natural resources, and reproduction and development of living organisms.

• Extractive Industries: Extract something from natural sources (earth, water, air). E.g., mining, agriculture, fishing, quarrying.
• Genetic Industries: Concerned with the reproduction and multiplication of plants and animals. E.g., poultry farming, cattle rearing, plant nurseries, seed production.

2. Secondary Industries

These industries process the materials supplied by primary industries. They change raw materials into finished goods.

• Manufacturing Industries: Engaged in transforming raw materials or semi-finished products into finished goods.
  • Analytical: Analyses and separates different elements from the same material (e.g., oil refinery separating petroleum into petrol, diesel, kerosene).
  • Synthetical: Combines various ingredients to create a new product (e.g., cement industry combining limestone, gypsum, clay).
  • Processing: Involves successive stages for manufacturing a finished product (e.g., sugar industry, paper industry).
  • Assembling: Assembles components to make a new product (e.g., car manufacturing, computer manufacturing).
• Construction Industries: Engaged in the construction of buildings, roads, bridges, dams, canals, etc. They use products of manufacturing industries (like cement, steel, bricks) and apply engineering and architectural skills.

3. Tertiary Industries (or Service Industries)

These industries provide support services to primary and secondary industries, as well as facilitate trade. They are crucial for the smooth functioning of industrial and commercial activities.

• Transport
• Banking
• Insurance
• Warehousing
• Communication (including advertising)
• Packaging

Commerce

Commerce includes all those activities which are necessary for facilitating the exchange of goods and services. It involves all activities from the point of production to the point of consumption.

Commerce is concerned with removing the various hindrances in the process of exchange:

• Hindrance of persons: Removed by trade (buyers and sellers).
• Hindrance of place: Removed by transport.
• Hindrance of time: Removed by warehousing.
• Hindrance of risk: Removed by insurance.
• Hindrance of finance: Removed by banking and finance.
• Hindrance of information: Removed by advertising and communication.

Commerce is divided into two main categories:

1. Trade

Trade involves the buying and selling of goods and services with the objective of earning profit. It bridges the gap between producers and consumers.

• Internal Trade: Buying and selling of goods and services within the geographical boundaries of a country.
  • Wholesale Trade: Buying goods in large quantities from producers/manufacturers and selling in smaller quantities to retailers.
  • Retail Trade: Buying goods from wholesalers or manufacturers and selling in small quantities directly to the final consumers.
• External Trade: Buying and selling of goods and services between persons or organisations in two or more countries.
  • Import Trade: Buying goods from a foreign country for sale in the home country.
  • Export Trade: Selling goods to a foreign country from the home country.
  • Entrepot Trade: Importing goods from one country for the purpose of exporting them to another country (e.g., India importing goods from China and exporting them to Nepal).

2. Auxiliaries to Trade (Aids to Trade)

These are the services that facilitate trade by removing various hindrances. They are the tertiary industries which directly support commercial activities.

• Transport and Communication: Facilitates movement of goods from production centres to markets (place utility) and exchange of information.
• Banking and Finance: Provides funds to businesses and facilitates payments (finance hindrance).
• Insurance: Provides cover against risks like loss due to fire, theft, accident, etc. (risk hindrance).
• Warehousing: Provides storage facilities to hold goods until they are needed, creating time utility (time hindrance).
• Advertising: Informs potential buyers about the goods and services, helping to increase sales (information hindrance).

Industry and Commerce are inter-dependent. Industry produces the goods, and commerce makes them available to the consumers. Both are essential components of business activities.