All human beings, wherever they are, are required to perform some of the other activities to satisfy their needs. They pursue different occupations to earn a livelihood and to get some psychological satisfaction.
Activities that human beings undertake are known as human activities. Some of these activities are undertaken to earn money but others are performed to derive personal satisfaction.
On examination of human activities, one can find that some of these activities produce direct economic benefits.
Example:- working in an office, running a shop, practicing as a doctor, etc. while others do not produce direct economic benefits. Example:- cooking, playing, going to school, going to temple, etc.
Types of Human Activities
Human activities can be classified into two categories:
2. Non-economic activities
1. Economic activities
Activities that are undertaken by people with the object of earning money are known as economic activities.
These activities are concerned with the production, exchange, and distribution of goods and services.
The purpose of economic activities should be an expectation of money income which is used for further creation of wealth or assets.
Example:- Production of goods in a factory, distribution of goods by a wholesaler or retailer, working in a factory, lawyer, working as a teacher in a school, etc.
2. Non-economic activities
The activities which are undertaken by an individual with a motive of getting psychological satisfaction are known as non-economic activities.
The end result of non-economic activities is not earning profit for the creation of wealth but it gives satisfaction.
Example:- going to temple Charity social services etc.
Features of Business
1. An Economic Activity:- Business is considered an economic activity as it is undertaken with the objective or aim of earning money and livelihood and not for psychological satisfaction.
2. Production or Procurement of Goods and Services:- Every business enterprise either producers are procured goods or services from producers. Goods may consist of consumer or industrial goods and services may include transportation, banking, insurance, etc.
3. Dealing in Goods or Services on a Regular Basis:- Another important feature of the business is that it must sell or exchange goods or services on a regular basis. Buying or selling goods or services once or twice is not business. One single transaction of sale does not constitute a business.
For example, if a person sells his house to buy a new house, he is not doing business but if a person buys and sells a house on a regular basis to earn Commission, then it will be considered as business. Regularity of occurrence of a business transaction is a must.
4. Sales or Exchange of Goods and Services for the Satisfaction of Human Needs:- Business involves the sale or exchange of goods or services. The production of goods or services for self-consumption is not business. A farmer cultivating crops for himself and his family’s consumption only is not doing business.
But the farmer who is cultivating crops for sale is involved in business activity. Similarly, buying goods to gift to someone else is not business but buying goods for resale is business. So there must be a sale or exchange of goods or services in the business.
5. Profit Earning:- The main purpose of business is earning profit. If the profit motive is missing in a transaction, then it cannot be considered a business transaction. For example, goods are given in Charity and not a business activity. No Businessman can survive without earning sufficient profit.
6. Uncertainty of Return or Risk:– Another important feature of the business is the presence of risk factors in the transaction.
There is always a possibility of losses. It is not certain that a businessman will always earn adequate profit as market conditions may change, customer’s taste may change, there may be a strike in businessman’s own factory, etc.
All these can lead to loss. So in business transactions, there is always an element of risk involved.
Role of Profit in the business
Business is an economic activity. So earning profit is the main objective of every business. Although earning a profit cannot be the only or sole objective of a business, but it is a very important objective of every business. A businessman earns profit for various reasons:-
1. 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. Profit is needed to satisfy the needs of the businessman and his family members.
2. Expansion and Growth: The business is expanded only when it is earning a sufficient amount of profit. When profit is large, a part of it can always be reinvested for expansion or diversification of production and other operations of the business. Retention of profit is an internal source of funds.
The internal source of funds is more dependable and a cheaper source as compared to external source because when a business borrows from an external source it has to mortgage its Assets and pay a high rate of interest, whereas on retained profit there is no interest and the Company can easily use it for expansion and growth projects.
3. Symbol of Efficiency or an Index of Performance: Profits indicate whether a business is being managed efficiently or not. Profit act as an index of performance of those who manage the business.
Higher profits indicate the efficiency of Management and lower profits indicate inefficiency of Management. The success of a business can be judged by its ability to earn profit.
4. Reward for bearing the Risk: Profit is considered as a prize or reward Paid to a businessman for bearing the risk. Businessman invests money in the business only with the hope of earning profit.
The desire to earn profit motivates the businessman to bear the uncertainties and Unexpected risks. Profit and risk are directly related to each other. The higher the risk, the more is the profit, and the lower the risk, the less is the profit.
5. Helps to Gain Reputation or Goodwill: A profit-earning company always has a better reputation in the market as compared to companies that are running at a loss. The rate of earning profits helps in creating goodwill for the company in the market.
The market price of shares increases with the increase in profit. The companies with a high rate of profit are able to raise loans and obtain credit more easily. Even efficient employees prefer to work in profit-earning companies as these are able to offer higher wages and salaries.