This lesson offers examples, video clip clips and a risk-reward mini task to teach the relationship between innovation and also economic growth.

You are watching: Well-defined property rights give entrepreneurs the incentive to

Mini Activity

Risk-Reward money Auction


At the compete of this great students will be able to:

Differentiate between invention and also innovation.Provide instances of the costs and also benefits the innovation.Explain the relationship between innovation, productivity and also economic growth.Explain the role of entrepreneurship in financial growth.Identify establishments that encourage entrepreneurship.

Economic Concepts

InnovationInvestmentResidual claimant
TechnologyEconomic growthProfit

National Content criter Addressed

Standard 4: Incentives Matter

People respond predictably to positive and negative incentives.

Acting as consumers, producers, workers, savers, investors, and citizens, human being respond to incentives in order come allocate your scarce resources in means that administer the highest feasible returns to them.

Standard 9: role of Competition

Competition among sellers lowers costs and also prices, and also encourages producer to produce more of what consumers room willing and also able come buy. Competition amongst buyers increases prices and also allocates goods and services come those human being who are willing and able to salary the many for them.

The advent of brand-new products and production techniques by entrepreneurs is an essential form that competition, and also is a resource of technical progress and economic growth.

Standard 10: Institutions

Institutions evolve in market economic climates to help individuals and also groups achieve their goals. Banks, labor unions, corporations, legitimate systems, and not-for-profit establishments are instances of crucial institutions. A different kind that institution, plainly defined and well imposed property rights, is necessary to a market economy.

Property rights, contract enforcement, requirements for weights and measures, and liability rules influence incentives for civilization to produce and also exchange goods and services.

Standard 13: Income and Productivity

Income for most civilization is identified by the sector value the the abundant resources lock sell. What workers earn depends, primarily, ~ above the market value that what they produce and also how abundant they are.

To earn income, world sell fertile resources. These incorporate their labor, capital, natural resources, and also entrepreneurial talents.

Standard 14: Profit and also the Entrepreneur

Entrepreneurs are world who take the threats of organizing abundant resources to do goods and also services. Profit is crucial incentive the leads entrepreneurs to accept the dangers of organization failure.

Entrepreneurs are individuals what room willing to take risks in order come develop brand-new products and start new businesses. They acknowledge opportunities, enjoy working because that themselves, and accept challenges.Innovation is the arrival of an invention into a usage that has financial value.Entrepreneurs compare the meant benefits of entering a brand-new enterprise with the intended costs.Entrepreneurs expropriate the risks in organizing resources to develop goods and also services, and also they expect to earn profits.Entrepreneurial decisions influence job avenues for other workers.Entrepreneurial decisions are affected by government tax and also regulatory policies.

Standard 15: Investment

Investment in factories, machinery, new technology, and in the health, education, and also training of human being can progressive future requirements of living.

Increases in productivity result from developments in technology and other sources.Economic growth is a sustained rise in a nation’s production of goods and also services. It results from investments in human and physical capital, research and also development, technical change, and improved institutional arrangements and also incentives.Historically, economic growth has been the primary automobile for alleviating poverty and raising standards of living roughly the world.Economic expansion creates new employment and profit avenues in some industries, but growth reduces opportunities in others.Investments in physical and human capital can boost productivity, but such invest entail opportunity costs and also economic risks.Investing in brand-new physical or human capital involves a trade-off of lower current intake in anticipation of greater future production and also consumption.The rate of productivity increase in an economic situation is strongly influenced by the incentives that reward successful innovation and also investments (in research and also development, and also in physical and human capital).

Key Ideas

Download complete lesson guide for procedures and teaching tips.

1. Review:

ERP-3: human being respond to incentives in predictable ways. Choices are affected by incentives, the rewards the encourage and also the punishments the discourage actions. When incentives change, people’s choices adjust in predictable ways.

Economic growth is a sustained rise in a nation’s manufacturing of goods and services.Increases in productivity, together the an outcome of invest in human and physical capital, advanced incomes and standards that living.(Figure 1 – populace and innovation graph – North)Innovation – the successful arrival of technical advances – and also education room the significant sources of boosts in productivity.Evidence about the relative well-being of civilization in countries with various institutions – the formal and also informal rule of the video game that form incentives and also outline expected and acceptable creates of habits in social interaction – tells us that establishments matter.Institutions that foster economic growth room those that reward entrepreneurship for developments that increase productivity.

2. Technical progress makes feasible wealth-enhancing rises in productivity.

Technology is, fundamentally, a collective body of knowledge – what person societies know and have recorded. The is not merely a repertoire of tools, clinical equipment, or artifacts.In its simple form, an innovation consists of instructions for the production of goods and services. The recipes are based upon human understanding of natural phenomena; as we learn an ext about the physics world, we can devise much better recipes and far better manage our limited resources because that production.Technological progress occurs not at the allude of creation – the discovery of brand-new knowledge – yet at the allude of invention – when an increase in productivity arises indigenous the market-proven applications of new technology.

3. Invention is inextricably connected to entrepreneurship.

Innovation wake up only when entrepreneurs recognize the effects of brand-new technologies (knowledge) and put lock into productive use.The institutional structure of an economic situation may facilitate or inhibit this deliver of expertise to production. The Soviet Union, because that example, produced many inventions, but few innovations.Economic development occurs when a nation’s institutions carry out incentives because that entrepreneurship.

4. Profit, the prize for successful entrepreneurship, helps to point out resources, consisting of entrepreneurial talents, to their many highly-valued uses.

Economists distinguish in between labor and entrepreneurship. Entrepreneurs are investors, risking their resources in the existing with the expectation of future profits. Lock organize the tasks of others, consisting of laborers, in productive endeavors.Laborers, who perform not be afflicted with the threats of production or the promise of future rewards, trade their time and also talents for wages.Because entrepreneurs room responsible for the ultimate outcome of investments, lock are additionally known as “residual claimants.”As risk-takers, they insurance claim the “residual” – what remains abrickandmortarphilly.comr all the expenses of production have been paid. This residual is called “profit.”Successful investment leaves a positive “residual” – or profit.Profit acts as a magnet, illustration in various other resources, including completing entrepreneurs.Unsuccessful investment leaves the entrepreneur with bills to pay; the “residual” he insurance claims is a loss.Losses discourage additional investment, freeing up resources, including entrepreneurial talents, for more highly valued uses.Innovative entrepreneurs must be ready to be affected by each other the threats of production, gaining from profits and also learning indigenous losses.Profitable innovations lure resources, but also attract competitors.Increased competition reduces profits and also encourages one on-going search for boosted products and lower-cost methods of production.Unprofitable innovations create information around what is valuable in a market or economic climate – and what is not valuable!Note the the innovative procedure is a standard example of the famous economic dictum: profit is the motivator, compete is the regulator.

5. Invention creates a dynamic economy.

Entrepreneurs who successfully innovate produce wealth. They likewise pose challenges to others impacted by the innovations.Existing products and also services can come to be obsolete or inefficient in the face of more innovative assets or services.Owners the existing products or services are detailed incentives come innovate in the visibility of various other innovative competitors; otherwise, their wide range will it is in adversely impacted as their resources shed value.The on-going market difficulty presented by new innovations is well-known as “creative destruction”.

6. Invention requires investment in both human and also physical capital.

Investment is the willingness to forego consumption now in anticipation of better rewards in the future.Investment is risky, so the “future rewards” must be sizable enough to compensate because that the risks.Investment decisions room made by compare the risks and the potential rewards: the better the risk, the higher the potential reward crucial to to convince the entrepreneur come act.

7. Countries with establishments that encourage entrepreneurship likewise encourage the creation that leads to economic growth and also rising requirements of living.

Entrepreneurial creation leads to improvements in product top quality at typically lower costs and also market prices.Governmental establishments may encourage or discourage growth-producing innovation:Stable home rights and also well-enforced preeminence of law attract entrepreneurship.Particularly essential in reducing risk for business man is the government’s document of enforcement that multi-period contracts.Business taxes, regulations, and also poorly-protected property rights discourage entrepreneurship by reducing return on or boosting the danger of investment – or both.

See more: This Is The Story Of A Girl Who Cried A River And Drowned The Whole World

Ideas come Take away From This Lesson

New ideas, products and also processes the pass the test of the sector are taken into consideration innovations.Innovation is the an essential to boosted productivity and economic growth.Institutions the reward entrepreneurship produce incentives for an ext innovation.The economic changes that result from ongoing creation impose costs and also create benefits. Historical evidence, in the form of the boosting wealth of nations that support entrepreneurship, support the contention the the benefits significantly outweigh the costs.