Chapter 1 - The Big Ideas
Principles of Economics (Micro)
INSTRUCTOR: Steve Warwick
08/25/25
1.1 - Big Idea One: Incentives Matter
Real Example: Prison Ships
● Captains were originally paid for each prisoner they took onboard, not for
keeping them alive.
○ Result: No incentive to treat prisoners well.
○ Some captains even sold the prisoners’ food for profit once they reached
Australia.
● Later, the system changed: captains were paid only for prisoners who survived the
journey.
○ Now, captains had a reason to care if prisoners lived — because dead
prisoners meant lost money.
○ One writer joked that the captain became the “sincere mourner” — sincerely
sad about losing money!
What Did Adam Smith Say?
● In his book The Wealth of Nations (1776), he explained:
"It is not from the benevolence (kindness) of the butcher, the brewer, or the baker
that we expect our dinner, but from their regard to their own interest."
● In other words:
People don’t have to love us to help us — they just need incentives to do so.
1
, 1.2 - Big Idea Two: Good Institutions Align Self-Interest
with the Social Interest
● Self-interest can help everyone if it's guided in the right way.
○ Example: When ship captains were paid only for prisoners who survived,
they had a reason to take better care of them.
→ Their self-interest (money) matched the social good (keeping people
alive).
● Markets often work well at aligning self-interest and social good.
○ Think of a grocery store:
■ Farmers, truckers, and business owners are all trying to make
money.
■ But their actions also help you get food.
■ Adam Smith called this the "invisible hand"—people acting in their
own interest can still benefit society.
But markets don’t always work perfectly.
○ Sometimes self-interest hurts others:
■ A company may pollute the air because it’s cheaper for them—not
good for society.
■ Fishermen might catch too many fish, harming the environment.
■ People might skip flu shots because they only think about themselves,
not others who could get sick.
● The government can help when markets fail.
○ It can use taxes, subsidies, or rules to encourage better behavior.
■ Example: Taxing pollution or giving a discount for flu shots
.
2
Principles of Economics (Micro)
INSTRUCTOR: Steve Warwick
08/25/25
1.1 - Big Idea One: Incentives Matter
Real Example: Prison Ships
● Captains were originally paid for each prisoner they took onboard, not for
keeping them alive.
○ Result: No incentive to treat prisoners well.
○ Some captains even sold the prisoners’ food for profit once they reached
Australia.
● Later, the system changed: captains were paid only for prisoners who survived the
journey.
○ Now, captains had a reason to care if prisoners lived — because dead
prisoners meant lost money.
○ One writer joked that the captain became the “sincere mourner” — sincerely
sad about losing money!
What Did Adam Smith Say?
● In his book The Wealth of Nations (1776), he explained:
"It is not from the benevolence (kindness) of the butcher, the brewer, or the baker
that we expect our dinner, but from their regard to their own interest."
● In other words:
People don’t have to love us to help us — they just need incentives to do so.
1
, 1.2 - Big Idea Two: Good Institutions Align Self-Interest
with the Social Interest
● Self-interest can help everyone if it's guided in the right way.
○ Example: When ship captains were paid only for prisoners who survived,
they had a reason to take better care of them.
→ Their self-interest (money) matched the social good (keeping people
alive).
● Markets often work well at aligning self-interest and social good.
○ Think of a grocery store:
■ Farmers, truckers, and business owners are all trying to make
money.
■ But their actions also help you get food.
■ Adam Smith called this the "invisible hand"—people acting in their
own interest can still benefit society.
But markets don’t always work perfectly.
○ Sometimes self-interest hurts others:
■ A company may pollute the air because it’s cheaper for them—not
good for society.
■ Fishermen might catch too many fish, harming the environment.
■ People might skip flu shots because they only think about themselves,
not others who could get sick.
● The government can help when markets fail.
○ It can use taxes, subsidies, or rules to encourage better behavior.
■ Example: Taxing pollution or giving a discount for flu shots
.
2
