Reading: Lesson 3: Creating Value and Serving Others

Description:

Entrepreneurs create value for themselves by creating things that other people value.  The market is the sum of the interactions between people exchanging value for value. The market process directs resources to where they are most valued. In addition to increasing general wealth in society, exchange, specialization, and trade promote cooperation and social harmony.

In this lesson, students will read an article by Dwight Lee on supply and demand, in which he explains how these forces direct people to accommodate each other. Then, students will watch a brief video in which Matt Ridley explains that “everyone works for everyone else” and as a result, all of our lives are better. Finally, students will read an article about an affordable lighting product that has improved the lives of millions of impoverished people.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:         

Lesson 1 – Value is in the Eye of the Beholder

Lesson 2 – Value Must Be Produced

  

2.3.A – Read and discuss the following article using the questions below to guide your discussion [15 min]:

Article: Demand and Supply by Dwight Lee (FEE.org) – The Market Process Directs People to Accommodate One Another

Discussion Questions:  Demand and Supply

1.  What are the laws of demand and supply?

1. The law of demand states that as prices decrease consumers will demand a higher quantity of a particular good or service and as prices increase consumers will demand a lower quantity of a particular good or service. This is due to the inverse relationship between price and quantity demanded. In simple terms: as prices go down, the quantity people demand tends to go up.
2. The law of supply states that as prices increase, suppliers will be willing to supply a larger quantity of a particular good or service and as prices decrease suppliers will supply a smaller quantity of a particular good or service. This is due to the direct relationship between price and quantity supplied. In simple terms: as prices go up, the quantity people supply tends to go up.

 

2.  When the price of a good increases, what information is being communicated from buyer to seller, and buyers to other buyers?

1. When the price of something increases, buyers are signaling to sellers that they value this good more and that they want more resources devoted to producing this good, because this good is now worth more than what the resources were previously used for.
2. When this happens the sellers are willing to sell more of their good or service because they can now get a higher price for it. However buyers also signal information to other buyers –everyone should economize their use of that particular good, take good care of their goods and substitute other products because the good is now more expensive to consume.

 

2.3.B - Watch and discuss the following video using the questions below to guide your discussion [10 min]:

Video:(The Rational Optimist, 1:55 min)

“Matt Ridley highlights how market interactions depend on people doing things for each other, enabling the average person today to enjoy luxuries that were once the province of nobility. “Louis XIV … had 498 people to prepare his dinner every night. But you know what? Every single one of you has 498 people to prepare your dinner tonight. They’re working in cafés and bistros and restaurants and shops all over town, but each of them is ready at an hour’s notice to give you an extremely good meal that is probably less likely to have salmonella in it than Louis XIV’s did.”

Discussion Questions:  Everybody is Working for Everybody Else

1.  What does Ridley mean when he says “in a sense, we’re all kings now”?

1. He is referring to the numerous servants French king Louis XIV had, and how today we all have many more “servants” than the king ever did.
2. The average person today is wealthier than even the richest kings of the past.

 

2.  What is the result of increased exchange and specialization Ridley mentions in the video?

1. The number of people who “serve” us has increased, and the network of service has expanded to cross continents; a “collective intelligence, where everybody is working for everybody else to bring us whatever we need.”
2. In other words, increased exchange and specialization has led to greater cooperation and wealth.

 

3.  What are some other examples of “servants” that you or your family uses? What are some ways in which you or your parents serve others?

1. Answers could include: the people who made your: clothes, air conditioning/heating system, house, computer; or who teach you, treat you when you’re sick, etc.
2. The work parents and students perform at a job or through their business are examples of serving other people.

 

2.3.C - Read and discuss the following article using the questions below to guide your discussion [20 min]:

Article: This Product Can Change Your Life: The d.light Story by Simon Keane-Cowell (Architonic.com)

“Imagine, as a manufacturer, that your potential market is two billion consumers worldwide. This almost inconceivable figure is the ultimate scale of d.light’s ambition, a consumer products company set up by a pair of social entrepreneurs in 2007 to design and produce lighting solutions for the one in four people on this planet who live without electricity. With two million lives already positively affected by d.light’s innovative solar-powered lamps and counting, the company’s story is only just the beginning. Architonic spoke to co-founder and CEO Sam Goldman about this life changing project.”    

Discussion Questions: This Product Can Change Your Life: The d.light Story

1.  How did Sam Goldman use entrepreneurship to create value for others?

1. Goldman observed an opportunity to create value by serving a need: “Goldman cites personal experience as a starting point for the d.light project.
2. While living off grid, in Benin, he used, as the only option in many parts of the world, a kerosene lamp ‘every day and every night. It’s a horrible source of lighting’. Indeed, kerosene is a dirty, dangerous, and in terms of the light it produces, relatively poor-performing fuel, detrimental over time to the health of its users, not to mention hazardous nature in terms of fires.”
3. In order to best create value for his customers, Goldman made customer focus a major aspect of d.light: “'Our design team spends hundreds of hours in the field, interviewing, observing and sometimes even living the lifestyles of our customers. We also engage in an extensive prototyping process that engages the end-users at every step, getting their feedback on every single aspect of the product. Our customers have the final say in how our products are designed.'”

 

2.  For which groups has D.light created value?

1. D.light has created value for a number of groups. It provides value for its customers in the form of low cost, environmentally friendly, safer and healthier high quality lighting. The company’s solar-lamp products have affected the lives of two million people in over 40 countries, primarily in India and East Africa. “The effect that this has on quality of life in terms of allowing people to do work, study and socialize beyond daylight hours is, almost needless to say, far-reaching.”
2. The business has also created employment for people living in lower income countries. Through their business, the employees working at the company are creating value for others, as well as gaining value through their employment.
3. D.light has also created value for its investors ‘We focused on getting a 50/50 mix of more commercial investment money that would really drive the company towards commercial sustainability and more social investment money that would ensure that we keep sight of our objectives”

 

Lesson Recap

• To be successful, an entrepreneur must create value for others.

 

• The number of people who “serve” us has increased, and the network of “service” has expanded to cross continents; a “collective intelligence, where everybody is working for everybody else to bring us whatever we need.” In other words, it has led to greater cooperation and wealth.

 

• Prices contain information about supply and demand. For example, a rise in the price of something can indicate a rise in demand for that good or service, which tells producers to increase the supply. Prices also signify information to buyers: when a price increases, buyers know to use their goods wisely, take care of them, and use substitutes.

 

• Exchange and specialization lead to a system where “everybody works for everyone else” to provide things we want. In other words, exchange and specialization promote cooperation and harmony.

 

• The market process directs people to accommodate one another

 

Additional Resources

Article: Consumption, Innovation and the Source of Wealth  (FEE.org)

“The ultimate source of wealth in society is producers who create value. The hourly worker creates value by providing a marginal product whose value is greater than the real wage she is paid (though competition tends to keep this differential to a minimum). The firm as a whole creates value by producing an output that consumers value more than the sum of cost of the inputs used by the producer, including the value of time the production process takes. All this value creation can be seen as forms of innovation. The value creation that comes from the ongoing innovation of the market is what creates the wealth that makes consumption possible”

 

Video:  (The Rational Optimist, 18:20 min)

“Matt Ridley ZURICH.MINDS flagship event 2011 on Rational Optimism”

Podcast: Ridley on Trade, Growth, and the Rational Optimist (EconTalk, 59:03 min)

“Matt Ridley, the author of The Rational Optimist, talks with EconTalk host Russ Roberts about why he is optimistic about the future and how trade and specialization explain the evolution of human development over the millennia. Ridley argues that life is getting better for most of the people on earth and that the underlying cause is trade and specialization. He discusses the differences between Smith’s and Ricardo’s insights into trade and growth and why despite what seems to be strong evidence, people are frequently pessimistic about the future. Ridley also addresses environmental issues.   

 

Article: Japan’s Challenge: An Entrepreneurial Approach to Disaster Recovery  (Kauffman Fellows)

“In the past Japan has used its confrontations with crisis as opportunities to propel entrepreneurship. After its defeat in World War 2, young entrepreneurs like Sony’s founder Akio Morita and Honda’s Soichiro Honda helped the country rebuild from ashes to achieve remarkable economic growth. After the 1995 Kobe earthquake killed more than five thousand people, a young man from Kobe decided to quit a major corporation to start an internet electric commerce venture called Rakuten, which has since grown into a corporation with a market value of $13 billion. These facts raise hope that this time too, Japan can reinvent itself from tragedy”