CHAPTER – 1

EVOLUTION AND FUNDAMENTALS OF BUSINESS

LEARNING OBJECTIVES

 History of trade & commerce in India: Indigenous Banking System; Rise of

Intermediaries; Transport; Trading Communities; Merchant Corporations; Major
Trade Centres; Major Imports & Exports; Position of Indian Sub-Continent in the
World Economy
 Meaning of business with special reference to economic & non-economic activities
 Features & Objectives of business
 Concept & difference of Business, Profession & Employment
 Role of profit in business
 Classification of business activities: Industry & Commerce
 Types of Industry
 Commerce: Trade & auxiliaries to trade
 Concept, Nature & Causes of business risk

HISTORY OF TRADE AND COMMERCE IN INDIA

India has Himalayas in the north, bordered by water in south. India got connected to
adjoining foreign countries through the network of roads leading to Silk Route. The maritime
routes linked the east and west by sea and were used for trade of species known as a Spice
Route.

INDIGENOUS BANKING SYSTEM

Hundi: It is an instrument of exchange used in old times which involved a contract that
warrants the payment of money, a promise or order which is unconditional, and can be
exchanged through transfer by valid negotiation.

Hundi as practiced by Indian merchant Communities

Name of Classification Functions of Hundi

Hundi
Dhani-jog Darshani Payable to any person - no liability over the receiver
Sah-jog. Darshani Payable to a specific person - Liability created
 Firman-jog Darshani Payable to order.
Dekhan-har Darshani Payable to presenter or bearer
Dhani-jog Muddati Payable to any person over a fixed term – no liability
over who received the payment
Firman-jog Muddati Payable to order following a fixed term.
Jokhmi Muddati It is drawn against dispatched goods. Drawer bears the
costs if goods get lost in transit.
RISE OF INTERMEDIARIES

• Prominent role in promotion of trade

• Provide financial security in return of risk taken

• Comprises of Commission agent, broker, distributor

• Foreign Trade was financed by loans.

• Later with emergence of credit transaction, exports exceeded import and benefited
indigenous banking system

• Commercial bank and industrial bank evolved to finance trade and commerce

• Agricultural bank evolved to provide short-term and long-term finance to agriculturist.

TRANSPORT

Maritime Trade:-

• Trade maintained by means of sea is referred to as maritime trade.

• Maritime trade was another important branch of global trade network.

• Malabar Coast, on which Muziris is situated. Pepper was particularly valued in the Roman
Empire and was known as ‘Black Gold’

. • It was in the search for an alternate route to India for spices that led to the discovery of
America by Columbus in the closing years of 15th century and also brought Vasco-da-Gama
to the shores of Malabar in 1498.

• Calicut was such a bustling emporium that it was even visited by Chinese ships to acquire
items, like frankincense (essential oil) and myrrh (fragrant resin used in perfumes, medicines)
from the Middle East, as well as, pepper, diamonds, pearls and cotton from India.
• On the Coromandel Coast, Pulicat was a major port in the 17th century. Textiles were the
principal export from Pulicat to Southeast Asia.

TRADING COMMUNITIES: MERCHANT CORPORATIONS

• Formed to protect the interest of traders.

• Framed their own rules of membership and code of conduct which kings also accepted.

• Trade and industrial taxes were major source of revenue.

• The chief directly deal with king, tax collector and settle market toll on behalf of merchant
at fixed sum of money.

MAJOR TRADE CENTRES

➢ Pataliputra-Export of stones

➢ Peshawar-Export of wool and import of horses

➢ Taxila-Centre for learning

➢ Indraprastha-Commercial route on royal road

➢ Mathura-emporium of trade, people here subsisted on commerce

➢ Varanasi-Centre for textile industry

➢ Mithila-Traded at ports on the island of java, Sumatra, Borneo

➢ Ujjain- Agate, Muslin, carnelian cloth trading

➢ Surat-Textile trading mainly for their gold border (zari)

➢ Kanchi- Pearl, glass, rare stone

➢ Madura-Pearl fisheries

➢ Broaach-Linked to all important marts

➢ Kaveripatta-Trade of perfumes, cosmetics, scent, silk, wool, cotton, corals, pearls, gold,
precious stone, ship building

➢ Tamralipti-Greatest port connected by both sea and land.

MAJOR IMPORTS & EXPORTS

Exports consisted of spices, wheat, sugar, indigo (neel), opium (afim), sesame oil, cotton,
parrot, live animals and animal products—hides (khaal), skin, furs, horns, tortoise shells,
pearls, sapphires (neelam stone), quartz, crystal, lapis, lazuli, granites, turquoise and copper
etc.
Imports included horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin,
copper, lead, rubies, coral, glass, amber, etc.

POSITION OF INDIAN SUB-CONTINENT IN WORLD ECONOMY

 Between the 1st and the 7th centuries CE, India is estimated to have the largest
economy of the ancient and medieval world, controlling about one third and one-
fourth of the world’s wealth (timeline).
 The pre-colonial period in Indian history was an age of prosperity for Indian economy
and made the Europeans embark great voyage of discovery.
 18th century India was far behind Western Europe in technology, innovation and
ideas.
 After Independence, the process of rebuilding the economy started and India went for
centralised planning. The First Five Year Plan was implemented in 1952.
 India relied heavily on borrowings from foreign sources and finally, agreed to
economic liberalisation in 1991.
 The Indian economy is one of the fastest growing economies in the world today and a
preferred FDI destination.

CLASSIFICATION OF ACTIVITIES

1. Economic Activities: Economic activities are any activities that are carried out with the
goal of earning money and livelihood. For example, a worker working in a factory, a teacher
teaching in school etc. It is mainly of three types: Business, Profession & Employment.

2. Non-Economic Activities: Activities which are performed out of love, affection, sympathy
& without the aim of earning profit are called non-economic activities. For example -Social
work, religious activities etc.

MEANING OF BUSINESS
Any economic activity that is undertaken to earn profit through the mechanism of sale and
purchase of goods and services is called Business.

CHARACTERISTICS OF BUSINESS

1. An economic activity: Business consists of sale or exchange of goods and services with
the primary objective of earning money. Hence, it is an economic activity.

2. Sale or exchange of goods and services for creating value: In business there should be
transfer or exchange of goods or services for value.

3. Regularity in dealings: To constitute a business there should be dealings in goods and

services on regular intervals.

4. Production or procurement of goods and services: A business either manufactures the

goods on its own or purchases them from producers, and then sells them to end customers.

5. Profit earning: The primary objective of every business is to earn more and more profit.
No business can survive without earning profit.

6. Uncertainty of return: It’s not certain how much profit a business is going to earn, as
there is a possibility of losses as well because of the changing environment.

7. Risk: Every business is exposed to certain risks, these risks can either be due to natural
factors, human factors, financial factors, or personal factors.

Comparison of Business, Profession and Employment:

Basic Business Profession Profession

1. Mode of Entrepreneur’s Membership of a Appointment letter
establishment decision and other professional body and and service agreement
legal formalities, if certificate of practice
necessary
2. Nature of work Provision of goods Rendering of Performing work as
and services to the personalised, expert per service contract or
public services. rules of service
3. Qualification No minimum Qualifications, Qualification and
qualification is expertise and training training as prescribed
necessary in specific field as by the employer
 prescribed by the
professional body is a
must
4. Reward or Profit earned Professional fee Salary or wages
return
5. Capital Capital investment Limited capital needed No capital required
investment required as per size for establishment
and nature of business.
MULTIPLE OBJECTIVES OF BUSINESS

1. Economic Objectives

(i) Survival: The basic purpose of every organisation is to survive and exist in the
competition market for a long period of time.

(ii) Profit: The most important objective of every organisation is earning adequate amount of
profit. Profit is essential for survival, growth and expansion of business.

(iii) Growth: The success of any organisation is measured by the growth rate and growth is
measured in terms of sales, number of branches etc.

2. Social Objectives

(i) Supply of Desired Quality of Products: Customer prefer to buy the products only when
they are of satisfactory quality and are available at a reasonable price.

(ii) Avoidance of Unfair Trade Practices: Anti-social or unfair trade practices include black
marketing, adulteration, hoarding, overcharging, etc.

(iii) Employment Generation: The business man must create employment opportunities and
help in overcoming this basic problem of developing countries.

(iv) Social Service or Community Service: The big companies can help in social service
programmes run by NGOs and Government organisations by contributing large amount of
funds in the form of donations, charity, etc.

(v) Avoidance of Pollution: As a businessman has added to spreading of pollution, so it

becomes the moral duty of the businessman come forward and help in solving the problem of
pollution.
3. Human or Personal Objectives

(i) Providing good working condition.

(ii) Payment of competitive and satisfactory wages and salaries.

(iii) Personal growth and development of employee by imparting training to employees.

(iv) Peer recognition and respect by encouraging employees to take initiative and
participating in decision-making.

ROLE OF PROFIT IN THE BUSINESS

(i)Survival: A business and businessman cannot survive for a long time without earning
adequate profit. Profit is a source of income for a businessman which becomes his means of
livelihood.

(ii) Expansion and Growth: The business is expanded only when it is earning sufficient
amount of profit.

(iii) Symbol of efficiency or an Index of Performance: Profits indicate whether a business

is being managed efficiently or not. Higher profits indicate the efficiency of management and
lowest profit indicate inefficiency of management.

(iv) Reward for bearing the risk: Profit is considered as a price or reward paid to a
businessman for bearing the risk.

(v) Helps to gain reputation of goodwill: A profit earning company always has a better
reputation in the market as compared to companies which are running in loss.

CLASSIFICATION OF BUSINESS ACTIVITIES

A. INDUSTRY

It is basically concerned with the production of goods and services for an economic
motive. It is further divided into following categories:

1. Primary industry: It includes all those activities which are concerned with the extraction
and production of natural resources and development of plants, etc.

(a) Extractive industries: These industries provide some basic raw materials that are
mostly products of the natural environment. It includes farming, mining, etc.
(b) Genetic industries: These industries do breeding of plants and animals for their
use in further reproduction. Example- Cattle breeding, Poultry farms etc.

2. Secondary industry:- These industries are concerned with further processing of the
material extracted at the primary sector so as to convert them into a finished product.
Example, Mining of iron ore etc.

(a) Manufacturing industries: These industries engage in producing goods through

processing of raw materials and creating utilities. It is further divided into four parts:
(i) Analytical Industry: These industries separate different elements from the basic
material, so as to produce various by-products from the same element. For example,
petrol, diesel etc. all are made from one basic material that is crude oil.
(ii) Synthetic Industry: These industries bring together materials and ingredients
from varied sources and combine them to form a new product. For example, the
cement industry.
(iii) Processing Industry: These industries are involved in the extraction and
processing of resources and raw materials, so as to produce semi-finished or finished
products. For example, the Sugar industry, Paper industry, Textile industry etc.
(iv) Assembly Industry: These industries bring together different components of
various firms to form a new product. For example, different components of various
industries are brought together to assemble them and convert it into a television,
computer, car etc.
(b) Construction industries: These industries are involved in the construction sector
and it involves constructive works such as building dams, bridges, buildings, etc.
3. Tertiary industry:- These industries provide support services to primary and secondary
industries so that they can perform their work without any hindrances. For Example, Banking
industry, Transportation industry, Communication industry, etc.

B. COMMERCE

Commerce includes all the activities which are required for the exchange of goods and
services. It also involves all the activities that assists in removal of hindrances of people,
place, time, finance, risk, information faced during the exchange of goods and services.

1. Removing the hindrance of person- by marking goods available to consumers from the
producers. through trade.

2. Transportation removes hindrance of place- by moving goods from the place of production
to the markets for sale

3. Storage and warehousing activities remove the hindrance of time- by facilitating holding of
stock of goods to be sold as and when required.

4. Insurance removes hindrance of risk of loss or damage of goods due to theft, fire, accidents
etc.

5. Banking removes hindrance of finance- by providing funds to a businessman for acquiring

assets, purchasing raw materials and meeting other expenses.

6. Advertising removes hindrance of information- by informing consumers about the goods

and services available in the market

CLASSIFICATION OF COMMERCE
1. Trade: The buying and selling of goods and services with an aim to earn profit is termed
as trade. The people who are involved in trade are referred to as traders. Trade can be
bifurcated as: (a) Internal Trade and, (b) External Trade.

(a) Internal Trade: It refers to buying and selling of goods or services within the
geographical boundaries of a country.

(i) Wholesale trade: It refers to buying and selling of goods and services in large
quantities.
(ii) Retail Trade: It refers to buying and selling of goods and services in small
quantities.

(b) External Trade: It refers to buying and selling of goods or services beyond the
geographical limits of the country. It involves:

(i) Import: It refers to the purchase of goods and services from other countries.
(ii) Export: Selling goods and services to other countries.
(iii) Entrepot: Importing goods and services from one country and exporting to some
other country.

2. AUXILIARIES TO TRADE:

(a) Transport and Communication: Transportation helps in the movement of raw material
and finished products from the place of production to the place of consumption.
Communication enables easy interaction by one party with another, who is far away from
each other. It assists in removal of the hindrance cause due to place.

(b) Banking and finance: It helps business activities to overcome the problem of finance by
lending loans and credit facilities since business can't survive if funds are not available for
procuring material.

(c) Insurance: It provides protection to businesses from various types of risks such as due to
fire, theft etc. It assists in curbing hindrances of risk.

(d) Warehousing: It helps business firms to overcome the problem of storage and facilitates
the availability of goods. It assists in curbing hindrances of time.

(e) Advertising and Public Relations: It helps them to increase the sales. It is a tool to
influence customers. It assists in curbing hindrances caused due to information.
(f) Middlemen: These people act as mediators between the producer and consumers. These
include wholesalers, retailers etc. It assists in curbing hindrances of persons.

MEANING OF BUSINESS RISK

The risk caused due to inadequate profits or losses as a result of uncertainties or unexpected
events is called business risk.

NATURE OF BUSINESS RISK

(a) Risk is an essential part of every business. It can only be reduced but not
eliminated in full.
(b) It arises due to uncertainties like natural calamities such as earthquakes, floods
etc., which are unavoidable.
(c) The extent of risk depends upon the nature and size of business.
(d) ’No risk, no gain’ is applicable to every business. Hence, profit is the reward for
risk taking.

CAUSES OF BUSINESS RISKS

(a) Natural causes: These are due to natural causes such as floods, earthquakes, etc.
Every person has little control or no control over these causes.
(b) Human causes: These causes include unexpected events caused by man, such as
negligence of employees, power failure, employee’s or customer’s dishonest practices
(c) Economic causes: The economic causes involve the changes and variations taking
place in the economy such as uncertainties due change of technology and method of
production, political disturbances, change in prices, tax rates etc.
(d) Other causes: All those causes which cannot be considered under the above
causes are the other causes, such as exchange rate fluctuations etc.

USEFUL LINKS

https://diksha.gov.in/play/collection/do_31310347535117516811487?contentId=do_3130858
6845424844812738 VIDEO LINK

https://diksha.gov.in/play/collection/do_31310347535117516811487?contentId=do_3130768
36461264896111262 MULTIPLE QUESTIONS LINK

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3007678668818934 SHORT QUESTIONS LINK
https://diksha.gov.in/play/collection/do_31310347535117516811487?contentId=do_3130690
96755183616111230 LONG QUESTIONS LINK

SELF-ASSESSMENT

1. State the meaning of business.

2. How would you classify business activities?
3. What are the various types of industries?
4. Explain any two business activities which are auxiliaries to trade.
5. What is the role of profit in business?

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