Chapter 2

Wealth is created when assets move from

lower- to higher-valued uses.

 An individual’s value for a good or service is the

amount of money he or she is willing to pay for it
 The biggest advantage of capitalism is that it
creates wealth by letting a person follow his or
her self-interest.6 A buyer willingly buys if the
price is below his value, and a seller sells for the
same selfish reason—because the price is above
her value. Both buyer and seller gain; otherwise,
they would not transact.
Voluntary transactions create
wealth.
 The difference between the agreed-on price
and the seller’s value is called seller surplus.
 The buyer surplus is equal to his value minus the
price.
 The total surplus or gains from trade created by
the transaction is the sum of buyer and seller
surplus, the difference between the buyer’s and
the seller’s values.
DO MERGERS MOVE ASSETS TO
HIGHER-VALUED USES?

DOES THE GOVERNMENT CREATE

WEALTH?
The Holy Grail of economics.

An economy is efficient if all assets

are employed in their highest-
valued uses.
Making money is simple in
principle—find an asset employed
in lower-valued use, buy it, and
then sell it to someone who puts a
higher value on it.
The one lesson of business:

 The art of business consists of identifying assets in low-

valued
uses and devising ways to profitably move them to
higher-valued ones.
 First apply the “one lesson of economics” to each
government policy to identify which assets end up in
lower-valued uses. Next, think about applying the “one
lesson of business” to devise a way to profitably move
the assets to a higher-valued use.
CASES

 TAXES
 SUBSIDIES
 PRICE CONTROLS
 WEALTH CREATION IN ORGANIZATIONS