Chapter 2

Question 1

Explain Voluntary Transactions

Answer 1

Voluntary transactions create wealth by moving assets from lower- to higher-valued uses.

Anything that impedes the movement of assets to higher-valued uses, like taxes, subsidies, or price controls, destroys wealth.

The art of business consists of identifying assets in low-valued uses and devising ways to profitably move them to higher-valued ones.

Question 2

What Creates Wealth

Answer 2

Moving assets from lower value uses to higher-valued uses

Question 3

Define Value

Answer 3

Value = willingness to pay

Desire + Income = You want something + you can pay for it

Question 4

Explain Surplus

Answer 4

• Buyer’s Surplus - Buyer’s value minus the pri e
• Seller’s Surplus - The price minus the seller’s value
• Total Surplus - Buyer + seller surplus. (i.e. total difference b/t buyer and seller value)

Question 5

What is the Government’s role in wealth creation

Answer 5

• Enforcing property rights and contracts legal tools that facilitate wealth creating transactions
• Ensures that buyers and sellers keep gains from trade

Question 6

Define an Efficient Economy

Answer 6

An economy is efficient if all assets are employed in their highest-valued assets.

Question 7

What is the One Lesson of Economics

Answer 7

The One Lesson of Economics: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy;

• Must look at the intended and unintended effects of policies to understand their efficiency
• The economist’s solution to inefficient outcomes is to argue for a change in public policy.
• Business person’s solution is to try to make money on the inefficiency

Question 8

Define Inefficiency

Answer 8

Inefficiency implies the existence of unconsummated, wealth-creating transactions

Question 9

What three forces destroy wealth

Answer 9

• Taxes Destroy Wealth:
  
  • By deterring wealth-creating transactions – when the tax is larger than the surplus for a transaction.
• Subsidies Destroy Wealth:
  
  • Example: flood insurance encourages people to build in areas that they otherwise wouldn’t
• Price Controls Destroy Wealth:
  
  • Example: rent control (price ceiling) in New York City deters transactions between owners and renters

Question 10

Define wealth creation in organizations

Answer 10

Companies = a collection of transactions

They buy raw materials (capital, labor, etc.) and create and sell higher-valued goods and services