Chapter 1 - Nature of Business
B-COM Part 1 Introduction to Business Notes
Chapter 1 - Nature of Business
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* Industry
* Qualities of Good Businessman
* Capitalism
* Socialism
* Economic System of Pakistan
Chapter 1 Industry
* 1 Industry
o 1.1 Manufacturing Industry
o 1.2 Extractive Industry
o 1.3 Construction Industry
o 1.4 Genetic Industry
Industry
Manufacturing Industry
Manufacturing Industry converts the basis goods (raw materials) into the
finished goods. In other words, industry creates form utility in the
goods already produced by nature like furniture by wood, machines by
iron and cloth is made by cotton.
Extractive Industry
Extractive industry is generally related with the production of Primary
Gods. These industries are associated with agriculture, pastures,
mining, and fish keeping or finishing. These industries produce primary
goods, which are used in the manufacturing industries as raw materials.
These industries get the goods from surface, beneath the surface and in
the space.
Construction Industry
Activities of the construction industry are related to the houses, buildings, dams, bridges, canals etc.
Genetic Industry
Genetic Industry is concerned with the activities, which increase the
kinds of species. These industries can increases or change the kinds and
species of plants, fruits, animals. etc. through genetic changes.
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Qualities of Good Businessman
A well-managed business is generally a reflection of a person or persons
who have inherent or acquired qualities of leadership and direction. So
a businessman to succeed must be a well-balanced and full-fledged man
of talent. He must have a consistent mind for clearness, steadiness and
firmness in his dealings with others. Some of important and basic
qualities of businessman are following:
1. Accuracy
The businessman is that who knows what he is talking about, and what he
mean, because he deals with a number of simple wants. Accurate actions
depends upon accurate thinking. The goods businessman must be able to
grasp his problems by treating them quantitatively.
2. Time Sense
Besides quantity and the nature of his product, the businessman must
appreciate time. He must always thinking in terms of time. Actions
cannot be taken in complete isolation from each other. There is also a
chain of actions, which must fit in with the rapidly changing desires of
the ultimate consumer. This makes it vital to be able to visualize the
various actions in their places in time. There are no hunches in
business, but all actions depend upon figures and facts. The businessman
who has given adequate attention of quality and time will always be
ready to make the most of each opportunity as it arises, and to look
ahead as far as he needs.
3. Alertness
A businessman keen on success must keep in with the world, and not keep
himself to himself. He should move about and see what is going on for he
has to gauge new wants and new inventions for creating fresh wants. In
this sense he is to be merchant. For selling goods, which have been
produced requires character and knowledge. Even to decide what sort of
articles to try and produce with his machinery. The producer must be
something of a merchant. He must be wide-awake and meet the existing
demands and be in a position to create new ones.
4. Honesty
In order to adequately satisfy consumer demands, the businessman must be
honest. Misfit sales may be forced for a time by high pressure
salesmanship or misleading publicity, but they will not maintain
themselves; for each sale installs in the possession of the buyer an
article which begins at once to educate him as to error he made in
acquiring it, and there is little likelihood of a second order. But if
the seller uses all his ability to provide precisely what is wanted, he
makes goodwill for himself. This honesty and optimism which goes with it
are attributes of the businessman at his best.
5. Ability to Co-Operate
Another notable quality of the businessman is ability to co-operate with
a large number of other. He must be able to compromise, adjust, adapt
and be willing to admit that his judgment may on occasions be wrong.
Besides he must be temperamentally fitted to exercise a divided
authority. He shall be a goods businessman, if he can place himself in
the shoes of other people inside his own business so as to see into the
minds of customers who are outside it.
6. Dependability
Having once brought an organization into existence the businessman
should use every effort to hold it constant and dependable, so that
those who work under it know what to expect, as it remains unfluctuating
from day to day. At all times everybody knows what can and what cannot
be done. What is expected of him and what somebody else will do and can
adapt himself accordingly. A dependable businessman has satisfied
co-workers who are inevitably loyal to him and the unit directed by him.
7. Energy
A bountiful endowment of physical and nervous energy is another
requisite without which other qualities are hardly of any value. As in
any other activity so in business, infinite capacity to taking pains is
essential. In addition to possessing an abundance of energy, he should
possess forcefulness enough to put across his ideas and suggestions,
which he believes to be right.
8. Character
All talents are greatly enhanced in value when to them is added moral
character, because this gives the promise of energy, loyalty and steady
growth in ability and economy in supervision. Such a person, in the
words of Professor Hocking, will "through his eye, through his voice,
through his gestures, through the substance of what to say, through
absorption in his work and belief in his mission infuse his own, state
of mind into his men." He will avoid any sort of double-dealing, either
with his associates or with the rank and file. All false dealing is
futile; and it is absolutely destructive of loyalty.
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Capitalism
Economic Systems
Any society, whether it is rural without any advancements or it is
specialized, must somehow confront three fundamental and inter-dependent
economic problems.
1. What and how much to produce? 2. How to produce? 3. For whom to produce?
These three questions are fundamental and common to all economic but
different economic systems differ in the fact that they try to solve
these differently. Over the past two hundred years, different
philosophies have developed in regard to the accomplishment of the
economic function. The basic nature of all economic systems is the same.
It is the role of the individuals and the governments that are quite
different.
Capitalism
Definition
Under Capitalism, all means of production are the property of private
individuals and firms. They are free to use them with a view of making
profit or not to use them, if it so suits them. The desire for profit is
the sole consideration with the property-owners in the use of their
property. Besides free and unfettered use of their property, everybody
is free to enter into any contract with other fellow-citizens for his
profit.
What to produce, how to produce and for whom to produce-all these
central problems of economics are settled by the free working of the
forces of demand and supply.
Salient Features of Capitalism
1. Right of Private Property
Everybody has a right to acquire private property, to keep it, and after
his death, to pass it on to his heirs. The result of this system is
that inequalities of wealth distribution are perpetuated.
2. Freedom of Enterprise
This freedom implies three things: a) freedom of enterprise b) freedom
of contract and c) freedom to use one's property. Everybody is free to
take up any occupation that he likes and to enter into contracts or
agreements with his fellow-citizens in a manner most profitable to him.
Every citizen has the freedom to form any firm or company and set up a
factory anywhere hi likes.
3. Freedom of Choice by the Consumers
Every consumer enjoys a freedom of choice of the commodities and
services that he wishes to consume. It is the consumers likes and
dislikes which determine the magnitude and pattern of production.
4. Profit Motive
The profit motive of individuals governs business enterprise. Those
commodities and services are produced under capitalism, which are
expected to yield maximum profit rather than social benefit.
5. Class Conflict
The society has been divided into two classes the "Haves" and
"Have-Nots" which are constantly at war with each other class conflicts
is inherent in capitalism.
6. Un-Coordinated Nature
There is no conscious regulation or central direction of economic
activity. Every thing seems to go on automatically. Somehow the demand
and supply adjust themselves to each other. Price serves as the signpost
or the signal.
7. Entrepreneurs Role
The entire productive machinery of the country is under the direction of
the entrepreneur. It is he who hires the other factors of production
and undertakes to pay them. Everything hinges on him.
8. Control With Risks
This has been called the Golden Rule of Capitalism. He who risks his money must also control the business.
9. Competition
The producers compete with one another is selling the commodity as much
as they can through advertisement. On the other hand, there is also
competition among the buyers to obtain the commodity who did against one
another and offer higher prices for the purpose. Similarly, there is
competition among workers for jobs.
10. Importance of Price System
Capitalism is said to be governed by price. It is the price which
equates the demand and supply of commodities and factors of production.
Price is a signal which guides the producers as to what to produce and
what not to produce. A higher price is also warning to the consumers to
cut down their consumption.
11. Economic Inequalities
A few are very rich indulging in all sorts of conceivable luxuries,
whereas the masses are not able to get even two square meals a day. The
gulf between the rich and poor is ever widening.
Merits of Capitalism
1. Automatic Working
Capitalism does not require any central directing authority for its
functioning. It functions automatically through the price-mechanism. It
at any time, there is some disturbance in the economy, it is rectified
through price change.
2. Higher Efficiency and Incentive of Hard Working
Under capitalism workers and entrepreneurs are encouraged to work hard
to earn higher profits and higher wages. Hence the entire manpower
resources of the country work the hardest (In this way the national
output increases and economic development is accelerated).
3. Higher Rate of Capitalism Formation
People under capitalism have the right to hold property and pass it on
to then heirs and successors. Owing to this people save a part of their
income so that it can be invested to earn more income and leave larger
property for their heirs. This accelerates economic growth.
4. Economic Development and Prosperity
The lure of profit compels the entrepreneurs to take risks and to
conquer new fields in production. Capitalism offers great incentive for
saving and large opportunities for investment. It encourages innovation
and technological progress. It is thus conductive to economic growth and
prosperity.
5. Optimum Utilization of Resources
Every producer and entrepreneur tries to use the productive resources at
his disposal in the most economical manner in order to make maximum
profit. In this way, capitalism encourages the most efficient use of the
resources of the country.
6. Just System
The richest reward under capitalism goes to the ablest, the most daring
as well as the most prudent entrepreneur. A man who shows extraordinary
resourcefulness and pluck makes the highest profits.
7. Democratic
In the capitalistic economy an attempt is made to adjust production to
the consumer wishes. They consume that they like and not what is
supplied to them. The consumers constitute the general public. Hence,
the system is democratic.
8. Encouragement to Enterprise
Capitalism discourages the entrepreneurs to take risks and adopt bold
policies. Higher the risk greater is the profit. They also make
innovations in order to cut their costs and maximize their profits.
Hence, capitalism brings about a great technological progress in the
country.
9. Flexibility
One of the principal advantages of capitalism is its flexibility and
adaptability, which has enabled it to function from time to time
according to changing circumstances and emerge victorious.
Demerits of Capitalism
1. Wasteful Competition
Competition is a sheer waste. Colossal expenditure is incurred on
advertisement and salesmanship simply to defeat a rival. Resources
employed by those who are defeated go to waste.
Competition results in the production of too many varieties. But too
much variety is wasteful, because a small variety, but each large in
quantity, can be more economically produced.
2. Human Welfare Ignored
The economic decisions made by individual entrepreneurs and producers
under capitalism are based on their self-interest and not from the point
of view of good of the society. However, necessary and useful the
commodity may be, the producers will produced it if price does not
exceed the cost, because it is only the profit motive which drives them.
Social welfare is ignored altogether.
3. Economic Instability and Unemployment
Production is unplanned and is being augmented by ever increasing
accumulation of capital, while the bulk of the consumers are being
impoverished more and more. The result is economic instability. The
workers have to live under a perpetual dread of losing their job. They
have no sense of security.
4. Property Rights take Precedence Over Human Rights
Capitalism lays under emphasis on property rights as against human rights. Money, not man, rules the world and debases humanity.
5. Class-Conflict
Capitalism divides the society into two hostile camps of capital and
labour, the "haves" and "have nots". The labour wants higher wages and
short working hours, which is against the interests of capitalists.
Strikes and lockouts are inevitable.
6. Economic Inequalities
A feature of capitalistic countries is the glaring inequalities of
wealth and income. A few are very rich indulging in all sorts of
luxuries, whereas the masses are not able to get even two square meals a
day. The gulf between the rich and poor is ever widening.
7. Mis-Allocation of Resources
Capitalism is also criticized on the ground that the productive
resources are utilized for the production of luxuries for the rich
without producing sufficient quantity of goods for mass consummating.
The market prices are not a correct index of the wishes and needs of the
general public because the rich people are able to influence the market
prices by their higher income.
8. Emergence of Monopolies
I also happens under capitalism that perfect and free competition ceases
to prevail and instead of big combinations of powerful producers and
monopolies emerge against whom it becomes difficult for an ordinary
entrepreneur to compete. The monopolists produce small quantity but
charge high prices and thus exploit the consumers. There is lot of
concentration of economic power in a few hands.
9. Malpractices
In recent years, the image of capitalism has been tarnished by
malpractices indulged in by high industrialists and businessmen. Such
practices include payment of handsome salaries to influential directors,
the large-scale evasion of fiscal laws, luxurious living at nation's
cost and persistent generation of black money.
10. Lack of Coordination
The in-coordinated nature of such an economic order sometimes becomes a
disadvantage. Production is conducted as a result of the decisions of
numerous isolated entrepreneurs and consumers, which is liable to create
confusion in the system.
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Socialism
Definition
Socialism is an economic system, which implies state ownership of
instruments of production. The management of business and industry is
reduced to the monopolistic control of the government. What is produced
is equally divided among those who helped produce rather than having
anything into profits. Thus, economy is run for social benefit rather
than private profit.
Salient Features
1. State Ownership of Means of Production
The means of production are the property of the state and not of private
individuals. The profits of all enterprises go to the state exchequer
to be utilized for the benefit of society rather than for the benefit of
few private individuals.
2. No Private Enterprise
production is to be initiated and conducted by the state, which will pay
wages and other costs and keep profits to itself. Interest and rent as
payments respectively to the capitalists and the landlords will
disappear, the for the state will by the capitalist, landlord and
entrepreneur.
3. Economic Equality
Remuneration for work is to be according to the nature of work and is not to be equal. Earnings will vary according to ability.
4. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family
has an equal opportunity to rise in life under socialism. Every young
person is given equal opportunity to receive education or training
according to his aptitude os that he can enter a profession of his
choice.
5. Economic Planning
The state is in charge of both production and distribution. The
allocation of the productive resources of the community will be
determined according to the direction of a central authority.
6. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in
the economy rather than private profit. Commodities and services of such
type and in such quantities are produced which are essential for
promoting social welfare.
7. Classless Society
The socialists believe in a classless society where the distinction
between the rich and the poor and the "haves" and the "have-nots" has
completely disappeared.
Merits of Socialism
1. Social Justice
Under socialism, the inequalities of income are reduced to the minimum
and the national income is more equitably and evenly distributed.
2. Better Allocation of Resources
The productive resources of the nation are more economically and
optimally allocated among the various productive uses. A central
planning authority determines the allocation of resources among the
various uses who is in a better position to assess the basic needs of
the people and the intensity of their desires.
3. Rapid Economic Growth
A socialist state promotes rapid economic growth. The task of promoting
economic growth is not left in the hands of free private enterprise or
market mechanism. A socialist state adopts economic planning and makes
it possible to use potential productive resources in the most effective
and fruitful manner.
4. Improving Productive Efficiency
Under socialism, improved techniques of production and scientific
research are made freely available to all organizations that may need
them. Also, under socialism, concentrating production in big firms
results in improvement of production techniques. A socialist state makes
the fullest use of productive activity.
5. Social Security and Welfare
The socialists believe that people should be given protection against
uncertainties relating to income work and living conditions and the
burden of this provision should be borne by the entire society. That is
why modern socialists include in their programme, schemes of the social
insurance covering unemployment, accidents, sickness, old age pensions,
death grants, etc.
6. Economic Stability
Socialism eliminates trade cycles, We do not come across depression,
unemployment and idel productive capacity in socialists economies. Since
the means of production are owned and controlled by the state, the
level of investment and the level of aggregate demand can also be
effectively determined. This ensures economic stability.
7. Equality of Opportunity
Every individual, whether he belongs to a rich family or a poor family
has an equal opportunity to rise in life under socialism. Every young
person is given equal opportunity to receive education or training
according to his aptitude so that he can enter a profession of his
choice.
8. Social Welfare and Social Security
It is social welfare consideration, which guides productive activity in
the economy rather than private profit. Commodities and services of such
type and in such quantities are produced which are essential for
promoting social welfare.
9. Classless Society
The socialists believe in a classless society where the distinction
between the rich and the poor and the "haves" and the "have-nots" has
completely disappeared.
Demerits of Socialism
1. Bureaucracy and Red Tapism
The most important set of arguments advanced against socialism is one
against the bureaucratic running of the economic machinery. The civil
servant does not feel the same keen self-interest as the employee of a
private corporation, where his tenure is not so secure. His main concern
is to lot things go on somehow without a positive break down.
Bureaucracy will further mean bossism, loss of individual liberty,
Gestapo, etc.
2. Not Successful in Business
The government personnel are not such as can conquer new fields. The
conditions in government services are not congenial for the display of
extraordinary ability.
3. Insufficient Resources
It is also urged that government cannot raise the huge amounts of
capital, which are necessary for the efficient running, and expanding of
all industries and trades.
4. Mis-Allocation of Resources
Under socialism, there will be no automatic indicator like price
mechanism for the most economical allocation of the resources of the
community among different industries. Some commodities will be produced
in excess and wasted, whereas there may be a shortage of others
resulting in unsatisfied demand. As such a chronic maladjustment in
demand and supply is feared.
5. Lack of Incentives
It is also feared that incentive to hard work and stimulus to
self-improvement will disappear altogether when personal gain or
self-interest is eliminated. Inventive ability, enterprising spirit and
the go-ahead attitude will languish.
6. Loss of Economic Freedom
A serious charge against socialism is that, when freedom of enterprise
disappears, even the free choice of occupation will go. Workers will be
assigned certain jobs and they cannot change them without the consent of
the planning authority.
7. No Economic Equality
Socialism has failed to bring about economic equality. The dream of a
classless society is far from being realized. Some degree of skepticism
in the efficacy of socialism as a panacea for all social ills has grown
and damped the armour of some enthusiastic socialists.
8. Concentration of Power in the State
Under socialism, the State is not merely a political authority but it
also exercises unlimited authority in the economic sphere. The State is
everything and individual is nothing. He may not count at all.
9. Loss of Personal Liberty
That under socialism there is no unemployment is conceded out. Critics
regard a socialist State as one big prison-house and they do not think
that employment is any compensation for the loss of liberty.
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Economic System of Pakistan
In Pakistan, we have neither of the two extreme systems but our economic
system is a via media compromise of both the systems of capitalistic
and socialistic patterns. It can safely be said that it is a mixed
economy.
Concept of Mixed Economy
Mixed Economy is an economic system, which combines in itself the
elements of socialism as well as of capitalism. It is an economic
system, which is planned and directed partly by the state and by private
enterprise. Under the "Mixed Capitalist System" or "Mixed Enterprise
System", both State and private institutions exercise economic control.
Panacea of the Defects of Capitalism and Socialism
A privately owned capitalist system cannot guarantee full employment and
elimination of poverty. It may lead to unequal distribution of wealth
and air and water pollution. It produces trade cycles. i.e. sometimes
depression and at other times an inflationary situation. On the other
hand, a government owned business system might stifle innovation and
invention. It may not be quickly responsive to public desired for
products and services and may even limit the freedom of the people. It
is so realized that economic development cannot be achieved at the
desired rate of growth without any active government help and guidance.
That is why most of the capitalistic and socialistic economics of world
have become mixed economics in order to minimize the evils of
unadulterated capitalism and socialism to accelerate economic growth.
Salient Features of Economic System of Pakistan
1. Co-Existence of the Public and Private Sectors
In the economy both public sector and the private sector function
together. In one part are those industries, the responsibility for the
development of which is entrusted to the state and they are owned and
managed by the state. Other industries are left under the authority and
control of the private entrepreneurs. The private sector is free to
develop them and start new enterprises in this sector.
2. Role of Price System And Government Directives
So far as the public sector is concerned, economic decisions relating to
production, prices and investment are made by the government or
authorities appointed by the government. In industries in the private
sector, the decisions regarding investment, production, prices, etc, are
made by private entrepreneurs with the object of making maximum profit
on the basis of the price system.
3. Government Regulation and Control of Private Sector
In a mixed economy, the government adopts necessary measures to regulate
and influence the private sector, so that it may function in the
interests of the nation rather than exclusively in the interests of the
private entrepreneurs.
4. consumer's Sovereignty Protected
The consumers are free to buy commodities of their choice and the
private entrepreneurs produce commodities according to consumer's demand
or preferences, although the government can control their prices in
public interest so that they can be prevented from rising unduly high.
Besides, the government can also ration the commodities in short supply
so that the limited available quantities can be fairly distributed.
5. Government Protection of Labour
In a mixed economy, Government saves labour from exploitation by the
exploitation by the capitalists. Several factory acts have been passed
to regulate the working conditions of labour. The government also takes
necessary steps to prevent industrial disputes.
6. Reduction of Economic Inequalities
The governments in mixed economics take necessary steps for the
reduction of inequalities of income and wealth for promoting social
justice and social stability and social welfare, increasing production
and for providing equal opportunities for all.
7. Control of Monopoly
A charge against monopolies is that they reduce output and raise prices
in order to get maximum profit leading to miss-allocation of productive
resources of the community, economic inequalities, and unemployment and
hampering of industrial development.
The government tries to control and regulate monopolies in order to
remove the above evils and make them function in public interest. Also,
when the government considers it necessary in public interest, it takes
over monopolies and operates them in public interest.
8. Government Provision of Public Services
The government provides certain indispensable public services without
which community life would be unthinkable and which by their nature
cannot appropriately be left to private enterprises. Examples are the
maintenance of national defence, of internal law and order and the
administration of justice etc.
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