[SalesForce] Extending force:sdls and using lightning :xxx tags in component

I am on a summer 16 dev box trying to get a hang on lightning apps, I started looking at this documentation. My locker service is disabled

Enable Lightning LockerService Security This critical update enables
LockerService, a new and advanced security layer for your Lightning
Components. 2/11/2017 138 days remaining Not Activated

https://www.lightningdesignsystem.com/platforms/lightning/

I am facing issues when trying to extend force:slds to my application

1) How do I extend force:slds in <aura:application> to use Lightning design system sytle sheets?

Failed to save undefined: No APPLICATION named markup://force:slds
found :

As per docs :

Your Lightning Out, LC4VC, and Lightning Application automatically get
the Lightning Design System stylesheets and design tokens if they
extend force:slds. This is the easiest way to stay up-to-date and
consistent with SLDS enhancements.

2) When I try to include lightning:XXX tags in my component I get the component not found error. Is this because I have an older version of SLDS package in static resource?

Failed to save undefined: No COMPONENT named markup://lightning:badge
found

I am able to add ui:xxx, force:xxx, aura:xxxx tags in the component except the lightning:xxx tags.