Business: Purpose and Classification | ISC Class 11 Business Studies Notes

This note covers the meaning and features of business, its economic and social objectives and the role of profit, the classification of business activities into industry (primary, secondary and tertiary, and by size into micro, small, medium and large) and commerce (its nature and functions, the importance of commerce, trade, domestic and international, and the aids to trade such as transportation, warehousing, banking, finance, insurance and advertising), and the meaning of business ethics and Corporate Social Responsibility.

What is business, and what are its features?

The term business is derived from the word 'busy'. In a specific sense, 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.

It may also 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.

Definition: Business. 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.

Business is distinguished from other activities by several characteristics. It is an economic activity, undertaken for money or livelihood rather than out of love, affection or sympathy; it may be carried on at a small individual level (such as purchase and sale by a shopkeeper) or on a large, organised scale (such as a company).

It involves production or procurement of goods and services before these can be offered to consumers; a business must either manufacture what it deals in or acquire it from producers.

There must also be sale or exchange of goods for value; cooking food for one's own family at home is not business, but cooking and selling it in a restaurant is.

Business involves dealings on a regular basis: a single, isolated sale of a personal item, even at a profit, is not a business activity. Earning profit is a main purpose, since no business can survive for long without it.

Finally, every business carries uncertainty of return and an element of risk, because the amount of profit to be earned is never known in advance and losses are always possible despite the best efforts of the owners.

What are the objectives of business: economic and social?

An objective is the starting point of business; it refers to all that business people want to get in return for what they do.

It is commonly believed that profit is the sole purpose of business, but business enterprises are part of society and must fulfil several further objectives, including social responsibility, in order to survive and prosper in the long run. Profit is a leading objective, but not the only one.

Objectives are needed in every area that influences the survival and prosperity of business, so a business requires multiple objectives rather than just one.

What are the economic objectives of business?

These include market standing, that is, maintaining goodwill and reputation so as to stand on a strong footing against competitors by offering competitive products at reasonable prices to customers' satisfaction;

innovation, meaning the introduction of new ideas or methods, either in the product or service itself or in the skills and activities needed to supply it, since no enterprise can flourish in a competitive world without it;

productivity, which compares the value of output with the value of inputs and is used as a measure of efficiency; and the acquisition and efficient use of physical and financial resources, such as plants, machines, offices and funds.

Earning profits on the capital employed remains an essential economic objective.

What are the social objectives of business?

Social objectives are the obligations that a business owes to the different groups that make up society, and they are pursued alongside the economic objectives rather than in place of them.

Towards its customers, a business should supply the right quality and quantity of goods and services at reasonable prices, and take proper precautions against adulteration, poor quality, lack of desired service and courtesy, and misleading or dishonest advertising.

Towards its workers, it should provide fair employment: opportunities for meaningful work, the right kind of working conditions, respect for the democratic right to form unions, and a fair wage and a fair deal from management.

Towards the community and the government, it should act as a good citizen by protecting the natural environment, avoiding smoky chimneys and dirty working conditions, respecting the laws of the country and paying taxes regularly and honestly, and it may also undertake community service such as charitable contributions to educational institutions or help to people affected by floods or earthquakes.

These social objectives are what the note earlier called social responsibility, the obligation of business firms to contribute resources for solving social problems and to work in a socially desirable manner.

What is the role of profit in business?

Every business is an attempt on the part of business people to get more than what has been spent or invested; profit is the excess of revenue over cost. Although earning profit cannot be the only objective of business, its importance cannot be ignored.

Merits of profit as a business objective

Profit may be regarded as an essential objective of business for several reasons. It is a source of income for business persons; it can be a source of finance for meeting expansion requirements; it indicates the efficient working of the business; it can be taken as society's approval of the utility of the business; and it builds reputation for the enterprise.

Limitations of over-emphasis on profit

Too much emphasis on profit, to the exclusion of other objectives, can be dangerous for good business.

Managers obsessed with profit may neglect responsibilities towards customers, employees, investors and society at large, and may even be inclined to exploit various sections of society to earn immediate profit.

This can result in non-cooperation or opposition from affected people against the malpractices of the enterprise, so that the enterprise loses business and is ultimately unable to earn profit, which is essential for its own survival and prosperity.

Profit is also linked to risk: the greater the risk involved in a business, the higher is the chance of profit, since an entrepreneur undertakes risk under the expectation of a higher return; profit is thus understood as the reward for risk taking.

How are business activities classified into industry and commerce?

Various business activities may be classified into two broad categories, industry and commerce. Industry is concerned with the production or processing of goods and materials, while commerce includes all those activities which are necessary for facilitating the exchange of goods and services.

On this basis, business firms are classified into industrial and commercial enterprises.

Definition: Industry. Industry refers to economic activities which are connected with the conversion of resources into useful goods, generally involving mechanical appliances and technical skills.

The term industry is also used loosely to mean groups of firms producing similar or related goods, for example the cotton textile industry refers to all manufacturing units producing textile goods from cotton.

In common usage, certain services such as banking and insurance are also referred to as an industry, as in "banking industry" or "insurance industry".

Industries themselves are divided into three broad categories, namely primary, secondary and tertiary, which are considered in detail below along with commerce.

What are the types of industry on the basis of activity: primary, secondary and tertiary?

Primary industries include all those activities concerned with the extraction and production of natural resources and the reproduction and development of living organisms and plants. These are divided into two kinds.

Extractive industries draw products from natural sources, supplying basic raw materials that are mostly products of the geographical or natural environment; these include farming, mining, lumbering, hunting and fishing operations.

Genetic industries are engaged in breeding plants and animals for use in further reproduction; seed and nursery companies are typical examples, along with cattle breeding farms, poultry farms and fish hatcheries.

Secondary industries use materials that have already been extracted at the primary stage and process them to produce goods for final consumption or for further processing by other industrial units; for example, mining iron ore is a primary industry, but manufacturing steel from it is a secondary industry.

These are of two kinds. Manufacturing industries process raw materials to create finished products, such as steel, cement, sugar, paper and cars.

Construction industries are involved in constructing buildings, dams, bridges, roads, tunnels and canals, in which engineering and architectural skills are important.

Tertiary industries are concerned with providing support services to primary and secondary industries as well as activities relating to trade. As business activities these may be considered part of commerce, because as auxiliaries to trade they assist trade; they include transport, banking, insurance, warehousing, communication, packaging and advertising.

What are the types of industry on the basis of size: micro, small, medium and large?

Industries are also classified by the scale of their operations rather than by the nature of their activity.

A business may be set up as part of the MSME sector or as a large-scale enterprise, and this choice is one of the important factors to be decided at the start of a business, depending on expected demand for the product and the capital the entrepreneur can arrange.

If the entrepreneur is confident that demand is likely to be good over time and the necessary capital can be arranged, the business can be started on a large scale; some factors favour a large size, while others tend to restrict the scale of operation.

On the basis of size, industries are grouped into micro, small, medium and large industries. In India the first three together form the MSME sector (micro, small and medium enterprises), defined under the Micro, Small and Medium Enterprises Development Act, 2006.

An enterprise is classified on two criteria taken together: its investment in plant and machinery or equipment and its annual turnover. The limits in force from 1 April 2025 are set out below.

An enterprise that crosses either limit of its category moves up to the next category. Typical examples: a tailoring unit or a small bakery is a micro enterprise; a unit making auto parts for a car company is often a small or medium enterprise; a steel plant or a car manufacturer is a large industry.

Distinguishing features. Micro and small units need little capital, are usually run by the owner with a few workers, use simple technology and serve local markets. Medium units have more capital, some professional management and wider markets. Large industries need heavy investment, employ many workers, use advanced technology and often serve national and international markets.

Small and micro units are usually simpler to set up and manage, with lower capital requirements, while medium and large units generally need greater capital, more organised management and wider markets.

The choice of scale affects almost every later decision in the business, including location, financing, workforce and the technology used.

What is the nature and function of commerce?

Definition: Commerce. Commerce includes two types of activities, namely trade and aids to trade, and consists of activities of removing the hindrances of persons, place, time, risk, finance and information in the process of exchange of goods and services.

Buying and selling of goods is termed trade. But a lot of activities are required to facilitate the purchase and sale of goods; these are called services or aids to trade, and include transport, banking, insurance, communication, advertisement, packaging and warehousing. Commerce, therefore, includes both trade and the aids that support it.

Commerce provides the necessary link between producers and consumers. It embraces all those activities which are necessary for maintaining a free flow of goods and services, so that all activities involving the removal of hindrances in the process of exchange are included in commerce.

The hindrance of persons is removed by trade, making goods available to consumers from the possession of producers. Transport removes the hindrance of place by moving goods from the place of production to the market.

Storage and warehousing remove the hindrance of time by holding stocks of goods to be sold as required. Insurance protects against the risk of loss or damage to goods held in stock or in transit.

Banking and financing institutions provide the capital required to undertake these activities. Advertising removes the hindrance of information by making it possible for producers and traders to inform consumers about the goods and services available.

Why is commerce important, and what is the difference between domestic and international trade?

Commerce is important because, in the absence of trade, it would not be possible to undertake production on a large scale; producers cannot themselves reach out to every individual buyer, so businessmen engage in trading activities to make goods available to consumers in different markets.

Trade, therefore, is an essential part of commerce, referring to the sale, transfer or exchange of goods, either physical or virtual, and helping to make goods produced available to the consumers or users who need them.

Trade is generally understood to be of two kinds. Domestic trade is the buying and selling of goods and services within the boundaries of one country, while international trade is trade carried on between parties in different countries, involving exports and imports.

What are the aids to trade: transportation, warehousing, banking, finance, insurance and advertising?

Activities which are meant for assisting trade are known as aids to trade. They are generally referred to as services because they facilitate the activities relating to industry and trade, helping to remove various hindrances that arise in connection with the production and distribution of goods.

1. Transport and communication: production of goods takes place in particular locations, such as tea in Assam, cotton in Gujarat and Maharashtra, jute in West Bengal and Odisha, and sugar in Uttar Pradesh, Bihar and Maharashtra, but these goods are needed across the country. Transport by road, rail or coastal shipping removes the obstacle of place by moving raw materials to the place of production and finished products to the place of consumption, while postal and telephone facilities allow producers, traders and consumers to exchange information.
2. Banking and finance: business activities cannot be undertaken unless funds are available for acquiring assets, purchasing raw materials and meeting expenses, so banking helps overcome the problem of finance through overdraft, cash credit, loans, advances, collection of cheques, remittance of funds, discounting of bills and, in foreign trade, helping exporters collect money from importers.
3. Insurance: business involves various types of risks to buildings, machinery, furniture, stock and goods in transit, as well as risks of accident to employees; on payment of a nominal premium, the amount of loss, damage or injury can be recovered from the insurance company.
4. Warehousing: since goods are usually not sold or consumed immediately after production, they must be held in stock, and special arrangements for storage prevent loss or damage while helping to maintain reasonable prices through continuous supply.
5. Advertising: since it is practically impossible for producers and traders to contact every customer individually, advertising and publicity make information available about features, price and quality to potential customers, while public relations builds a strategic, normally unpaid, communication relationship, as distinct from advertising, which is always a paid activity.

What is business ethics?

From the social point of view, business exists to supply goods and services to the people, while from the individual firm's point of view, its primary objective is to earn profit.

Business ethics concerns the question of what is morally right or wrong in the conduct of business, over and above what the law strictly requires.

Definition: Business ethics. The application of ethical, or moral, standards to business behaviour, so that a firm's dealings with customers, employees, investors and society are judged not only by what is legal but by what is fair and right.

Ethical responsibility includes behaviour expected by society that is not codified in law, for example respecting the religious sentiments and dignity of people while advertising a product.

There is an element of voluntary action in performing this kind of responsibility: a firm may act ethically in matters such as fair dealing with customers, honest advertising, fair treatment of workers and honest payment of dues, even where no specific law compels it to do so.

Business ethics is therefore closely linked to social responsibility, since both go beyond mere legal compliance to consider the wider good of society.

What is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility refers to the role that companies can play in meeting the agenda of sustainable development, entailing a balanced approach to economic progress, social progress and environmental protection.

There is no single universally accepted definition of CSR, but each definition underpins the impact that businesses have on society and the societal expectations placed on them.

Definition: Corporate Social Responsibility. As defined by the European Commission, "the responsibility of enterprises for their impacts on society." The World Business Council for Sustainable Development defines it as "the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families, as well as, of the community and society at large."

CSR is therefore a voluntary commitment that goes beyond the legal responsibilities of a firm, and it is closely linked to the social objectives of business discussed earlier.

It is also linked to business ethics, since both ask what is morally right in the conduct of business rather than merely what the law allows.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

How are manufacturing industries divided by method of operation?

Manufacturing industries are sometimes further divided into analytical industry, which separates different elements from the same material (as in an oil refinery); synthetical industry, which combines various ingredients into a new product (as in cement); processing industry, which involves successive stages for manufacturing finished products (as in sugar and paper); and assembling industry, which assembles different component parts to make a new product (as in television, car and computer manufacture).

How did trade develop in ancient India?

Ancient Indian trade centres show commerce at work. Pataliputra, known today as Patna, was a commercial town and a major centre for the export of stones. Varanasi grew as a major centre of the textile industry, becoming famous for beautiful gold silk cloth and sandalwood workmanship, and had trade links with Taxila and Bharuch.

Mathura was an emporium of trade where many routes from South India converged, while Ujjain exported agate, carnelian, muslin and mallow cloth and had land-route trade relations with Taxila and Peshawar. Broach, the greatest seat of commerce in Western India, stood on the river Narmada and was linked by road to other important trading marts.

Peshawar was an important exporting centre for wool and for the import of horses, with a large share in commercial transactions between India, China and Rome in the first century AD. Taxila served as a major centre on the land route between India and Central Asia and was also a city of financial and commercial banks. Surat was the emporium of western trade during the Mughal period, with textiles famous for their gold borders, or zari, and its hundi was honoured in markets as far off as Egypt and Iran.

What was the 'Make in India' initiative?

In more recent times, the Government of India launched the 'Make in India' initiative on 25 September 2014 to encourage national and multinational companies to manufacture their products in India, with job creation and skill enhancement across identified sectors of the economy as major objectives, alongside related initiatives such as 'Skill India' and 'Digital India'.

What does the Companies Act, 2013 say about CSR?

In India, the concept of CSR is governed by Section 135 of the Companies Act, 2013, which was passed by both Houses of Parliament and received the assent of the President of India on 29 August 2013.

The CSR provisions apply to companies with an annual turnover of ₹1,000 crore and more, or a net worth of ₹500 crore and more, or a net profit of ₹5 crore and more.

New rules, applicable from the fiscal year 2014-15 onwards, require such companies to set up a CSR committee of their board members, and to spend at least 2 per cent of their average net profit of the three immediately preceding financial years on CSR activities.

The indicative activities that may be undertaken under CSR are specified under Schedule VII of the Act. Only CSR activities undertaken in India are taken into consideration, and activities meant exclusively for employees and their families do not qualify under CSR.

How do business, profession and employment differ?

Glossary

• Business: 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.
• Industry: economic activities connected with the conversion of resources into useful goods, usually involving mechanical appliances and technical skills.
• Commerce: activities of trade and aids to trade that remove the hindrances of persons, place, time, risk, finance and information in exchange.
• Trade: the sale, transfer or exchange of goods, either physical or virtual, between buyers and sellers.
• Aids to trade: services such as transport, banking, insurance, warehousing and advertising that support trade and industry.
• Primary industry: an industry concerned with extraction of natural resources or breeding of plants and animals.
• Secondary industry: an industry that processes materials already extracted into finished or constructed goods.
• Tertiary industry: an industry providing support services to primary and secondary industries and to trade.
• Extractive industry: an industry that draws raw materials directly from natural sources, such as mining or fishing.
• Genetic industry: an industry engaged in breeding plants or animals for further reproduction.
• Domestic trade: buying and selling of goods and services within the boundaries of one country.
• International trade: trade carried on between parties in different countries, involving exports and imports.
• Business ethics: the application of moral standards of right and wrong to business behaviour.
• Corporate Social Responsibility: the continuing commitment of a company to contribute to economic development while improving the quality of life of its workforce, their families, the community and society.
• Business risk: the possibility of inadequate profits or losses arising from uncertainties or unexpected events.

Common errors and misconceptions

• Misconception: profit is the only objective of business. Correct: profit is a leading objective, but business must also pursue market standing, innovation, productivity, resource acquisition and social responsibility.
• Misconception: industry and commerce mean the same thing. Correct: industry is concerned with production or processing of goods, while commerce is concerned with facilitating their exchange through trade and aids to trade.
• Misconception: tertiary industries have nothing to do with commerce. Correct: tertiary industries such as transport, banking and insurance may be considered part of commerce because they act as aids to trade.
• Misconception: trade and aids to trade are the same. Correct: trade is the buying and selling of goods, while aids to trade are the supporting services, such as transport and insurance, that make trade possible.
• Misconception: any single sale of personal property is business. Correct: business requires dealings in goods or services on a regular basis; one isolated transaction does not constitute business.
• Misconception: legal responsibility and social responsibility are identical. Correct: legal responsibility is fulfilled by mere compliance with the law, while social responsibility goes beyond the law and involves an element of voluntary action.
• Misconception: social objectives are the same as economic objectives. Correct: economic objectives concern market standing, innovation, productivity, resources and profit, while social objectives concern quality goods, fair employment, community service and protection of the environment.

Exam-style questions with model answers

Q1. State whether the following statement is true or false: a single isolated sale of a personal item at a profit is a business activity. [1 mark]

1. False. Business requires dealings in goods or services on a regular basis, so one isolated transaction does not constitute business.

Q2. Complete the analogy: Extractive industry: Mining :: Genetic industry: ____________ [1 mark]

1. Poultry farm. Genetic industries are engaged in breeding plants and animals for further reproduction, and poultry farms are a typical example.

Q3. Define the term 'commerce'. [2 marks]

1. Commerce includes two types of activities, namely trade and aids to trade.
2. It consists of activities that remove the hindrances of persons, place, time, risk, finance and information in the process of exchange of goods and services.

Q4. Explain any two social objectives of business. [4 marks]

1. Towards customers, a business should supply the right quality and quantity of goods and services at reasonable prices, and guard against adulteration, poor quality and misleading advertising.
2. Towards workers, it should provide fair employment, meaning opportunities for meaningful work, the right working conditions, respect for the right to form unions, and a fair wage and fair deal.
3. Towards the community, it should protect the natural environment and avoid smoky chimneys and dirty working conditions.
4. Towards the government, it should respect the laws of the country and pay taxes regularly and honestly.

Q5. Distinguish between primary, secondary and tertiary industries, giving one example of each. [4 marks]

1. Primary industries are concerned with the extraction and production of natural resources and the reproduction of living organisms; farming and mining are examples.
2. Secondary industries use materials already extracted at the primary stage and process them into goods for final consumption or further processing; manufacturing steel from iron ore is an example.
3. Tertiary industries provide support services to primary and secondary industries and to trade; transport and banking are examples.
4. Primary and secondary industries deal in goods, while tertiary industries provide service facilities that assist trade as aids to trade.

Q6. Explain how transport, banking, insurance, warehousing and advertising each remove a hindrance in the exchange of goods. [8 marks]

1. Transport removes the hindrance of place by moving raw materials to the place of production and finished products to the place of consumption by road, rail or coastal shipping.
2. Banking and finance remove the hindrance of finance by providing funds through overdrafts, cash credit, loans and advances for acquiring assets and purchasing raw materials.
3. Insurance removes the hindrance of risk by allowing loss or damage to buildings, machinery, stock or goods in transit to be recovered from the insurance company on payment of a premium.
4. Warehousing removes the hindrance of time by holding stocks of goods so that they are available as and when required, helping to maintain reasonable prices.
5. Advertising removes the hindrance of information by informing potential customers about the features, price and quality of goods, since producers cannot contact every customer individually.
6. Trade itself removes the hindrance of persons by transferring goods from the possession of producers to consumers.
7. Together these activities maintain a free flow of goods and services between producers and consumers.
8. They support not only trade but also industry, and hence the entire business activity.

Q7. State the meaning of business ethics and Corporate Social Responsibility. [4 marks]

1. Business ethics concerns the question of what is morally right or wrong in the conduct of business, over and above what the law strictly requires.
2. It includes behaviour expected by society but not codified in law, such as respecting the religious sentiments and dignity of people while advertising.
3. Corporate Social Responsibility refers to the role that companies can play in meeting the agenda of sustainable development, with a balanced approach to economic progress, social progress and environmental protection.
4. The European Commission defines CSR as the responsibility of enterprises for their impacts on society.

Q8. Explain the role of profit in business. [8 marks]

1. Profit is the excess of revenue over cost, and every business is an attempt to get more than what has been spent or invested.
2. It is a source of income for business persons.
3. It can be a source of finance for meeting the expansion requirements of business.
4. It indicates the efficient working of the business.
5. It can be taken as society's approval of the utility of the business.
6. It builds the reputation of the enterprise.
7. Profit is the reward for risk taking, since an entrepreneur undertakes risk in the expectation of a higher return.
8. Profit is a leading objective but not the only one, because business must also serve social objectives to survive and prosper in the long run.

Key takeaways

• Business is an economic activity involving production and sale of goods and services with a profit motive, marked by regularity, risk and uncertainty of return.
• Business objectives include economic aims such as market standing, innovation, productivity and resource acquisition, alongside social responsibility; profit is a leading but not the only objective.
• Social objectives include supplying quality goods at reasonable prices, providing fair employment, serving the community and protecting the environment.
• Business activities are classified into industry, concerned with production, and commerce, concerned with facilitating exchange.
• Industries are grouped by activity into primary (extractive and genetic), secondary (manufacturing and construction) and tertiary industries, and by size into micro, small, medium and large industries.
• Commerce consists of trade, the buying and selling of goods, and aids to trade, the supporting services of transport, banking, insurance, warehousing and advertising.
• Domestic trade occurs within a country, while international trade crosses national boundaries through exports and imports.
• Business ethics concerns the moral rightness of business conduct, beyond strict legal compliance.
• Corporate Social Responsibility is a company's commitment to contribute to economic development while improving the quality of life of its workforce, their families, the community and society.

Test yourself

From which word is 'business' derived, and what does it mean in that sense?

Business is derived from the word 'busy', so business in that simple sense means being busy, though in a specific sense it means an occupation of regular dealing in goods or services for profit.

Name the two broad categories of economic activities into which business activities are classified by nature.

Business activities are classified into industry, concerned with production or processing of goods, and commerce, concerned with facilitating their exchange.

What are genetic industries, and give two examples.

Genetic industries are engaged in breeding plants and animals for use in further reproduction; examples include seed and nursery companies, and poultry farms.

Why are transport, banking, insurance, warehousing and advertising called 'aids to trade'?

They are called aids to trade because they are services that assist and support trade by removing hindrances of place, finance, risk, time and information in exchange.

State one argument for why profit is an essential objective of business.

Profit is a source of income for business persons and can also be used as a source of finance for meeting expansion requirements of the business.

Name the four groups of industry on the basis of size.

On the basis of size, industries are grouped into micro, small, medium and large industries.

State any two social objectives of business.

A business should supply the right quality and quantity of goods at reasonable prices to customers, and provide fair employment with meaningful work and a fair wage to workers.

Give the World Business Council for Sustainable Development's definition of CSR.

It defines CSR as "the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families, as well as, of the community and society at large."