2026
INTERMEDIATE MICROECONOMICS
MADE EASY
KOEN HANEGREEFS
VUB
,Table of Contents
CHAPTER 1 — FOUNDATIONS OF CONSUMER THEORY 2
CHAPTER 2 — CONSUMER CHOICE & INDIVIDUAL DEMAND 12
CHAPTER 3 — SLUTSKY EQUATION & MARKET DEMAND 20
CHAPTER 4 — INTERTEMPORAL CHOICE & UNCERTAINTY 27
CHAPTER 5 — TECHNOLOGY (H19) & PROFIT MAXIMISATION (H20) 38
CHAPTER 6 — COST MINIMISATION & COST CURVES 47
CHAPTER 7 — FIRM SUPPLY AND INDUSTRY SUPPLY 56
CHAPTER 8 — PERFECT COMPETITION EQUILIBRIUM (H16) & CONSUMER/PRODUCER SURPLUS
(H14) 63
CHAPTER 9 — MONOPOLY & MONOPOLY BEHAVIOUR 72
CHAPTER 10 — OLIGOPOLY & GAME THEORY 81
1
,Chapter 1 — Foundations of Consumer Theory
The Big Picture
Economics is fundamentally about choices made under constraints. You want many things, but you cannot have
everything — so how do you decide? This chapter lays the groundwork by answering three questions: what can you
afford (the “budget constraint”), what do you actually want (“preferences”), and how do we turn “wanting” into a
number we can do math with (“utility”). Think of it like planning a grocery run: you have a fixed wallet, a list of foods
you like more or less, and you try to walk out as satisfied as possible. Everything in this course builds on these three
ideas.
Scarcity in one picture: you choose among the bundles you can actually afford.
What Is Microeconomics?
Before diving in, a one-paragraph orientation. “Microeconomics” studies how individual people and firms make
decisions — how much to buy, how much to produce, what price to charge. It is the study of choice under constraints.
Macroeconomics, by contrast, zooms out to look at entire economies (think GDP or inflation). Micro is the foundation:
if you understand individual decisions, you can build up to the big picture.
Three tools appear over and over in this course:
• “Constrained optimisation” — pick the best option you can, given limits (e.g., a budget). This is the engine of
every consumer and firm problem.
• “Equilibrium analysis” — find the state where everyone is happy with their choice and nothing changes on its
own.
• “Comparative statics” — ask “what happens if one thing changes?” (e.g., if prices rise, how does behaviour
shift?).
2
,One big assumption runs throughout: people are “rational”, meaning they choose what they most prefer, given what
they know. This is a simplification — real humans forget things, get tired, and follow habits. But it gives us a useful
benchmark. Deviations from rationality are interesting precisely because we have a clear baseline to compare against.
The Budget Constraint
What it means in plain English
You have a fixed amount of money (your “income”) and you want to buy two goods. You cannot spend more than you
have. The collection of all affordable combinations is called the “budget set”, and the edge of that set — the
combinations that spend your entire income — is the “budget line”.
The idea in math
Let 𝑥! = units of good 1, 𝑥" = units of good 2, 𝑝! = price of good 1, 𝑝" = price of good 2, and 𝑚 = your income (money).
You can afford any bundle where total spending does not exceed income:
𝑝! 𝑥! + 𝑝" 𝑥" ≤ 𝑚
The budget line is the boundary — every euro is spent:
𝑝! 𝑥! + 𝑝" 𝑥" = 𝑚
Rearranging to get 𝑥" on its own (so we can draw it):
𝑚 𝑝!
𝑥" = − 𝑥
𝑝" 𝑝" !
#
This is just a straight line. The intercept on the vertical axis ( ) is how much of good 2 you could buy if you spent
$!
$"
nothing on good 1. The slope − tells you how much good 2 you must give up to buy one more unit of good 1 — this is
$!
the “opportunity cost” of good 1.
Worked example. Suppose 𝑚 = 120, 𝑝! = 3, 𝑝" = 6.
• Vertical intercept: 120/6 = 20 units of good 2.
• Horizontal intercept: 120/3 = 40 units of good 1.
• Slope: −3/6 = −0.5. For every extra unit of good 1 you buy, you give up half a unit of good 2.
So the budget line runs from (0, 20) to (40, 0). Any point on or inside that line is affordable.
3
,Budget line and budget set
What happens when income or prices change?
Income rises. If 𝑚 increases (say, you get a pay raise), both intercepts grow proportionally. The line shifts outward,
parallel to itself — you can afford more of everything. The slope does not change because prices are the same.
Income change
Price of good 1 falls. The vertical intercept 𝑚/𝑝" is unchanged (the price of good 2 did not move). But the horizontal
intercept 𝑚/𝑝! moves outward because good 1 is now cheaper. The budget line pivots outward around the vertical
intercept.
4
,Worked example. Using the same numbers (𝑚 = 120, 𝑝" = 6), suppose 𝑝! drops from 3 to 2.
• Old horizontal intercept: 120/3 = 40.
• New horizontal intercept: 120/2 = 60.
• The vertical intercept stays at 20.
The budget line rotates — you can now afford up to 60 units of good 1 instead of 40.
Price change
Taxes, subsidies, and rationing
Governments often interfere with prices. Each intervention reshapes the budget line:
• A “quantity tax” of 𝑡 per unit of good 1 raises its effective price to 𝑝! + 𝑡 → the line pivots inward.
• A “lump-sum tax” takes a fixed amount from income regardless of what you buy → the line shifts inward in
parallel (slope unchanged).
• A “quantity subsidy” lowers the effective price → the line pivots outward.
• “Rationing” caps how much of a good you can buy → the budget set gets a chunk cut off, creating a kink or a flat
segment.
5
,Quantity tax above threshold
A useful shortcut: multiplying all prices and income by the same number changes nothing. Only relative prices (the
ratio 𝑝! /𝑝" ) and real income (what you can actually buy) determine your options. This is sometimes called the
“numéraire trick” — you can always set one price equal to 1 to simplify the math.
Preferences
Ranking bundles
Before buying anything, a consumer must know what they want. We model this by assuming they can rank any two
“bundles” (combinations of goods). Three symbols capture the language of ranking:
• 𝑋′ ≻ 𝑋″ means bundle 𝑋′ is strictly preferred to 𝑋″ (you would always choose 𝑋′).
• 𝑋′ ∼ 𝑋″ means you are “indifferent” — equally happy with either.
• 𝑋′ ≽ 𝑋″ means you weakly prefer 𝑋′ (at least as good).
For this ranking to be logically consistent, we need three properties:
1. “Completeness” — you can always compare any two bundles. You never shrug and say “I have no idea.”
2. “Reflexivity” — any bundle is at least as good as itself. (Obvious, but necessary for the math.)
3. “Transitivity” — if you prefer A to B and B to C, you prefer A to C. Without this, a clever seller could cycle you
through trades and drain your wallet forever — the so-called “money pump.”
6
,Indifference curves
An “indifference curve (IC)” is the set of all bundles that make you equally happy — you are indifferent between all of
them. Draw good 1 on the horizontal axis and good 2 on the vertical axis. Each IC is a curve on that graph.
Two ICs can never cross. Why? Suppose they did cross at point A. Then bundles on IC1 and on IC2 both pass through
A, which would force you to be indifferent between a bundle on IC1 and one on IC2 — but the whole point of having two
separate curves is that they represent different levels of satisfaction. A crossing contradicts transitivity.
Indifference curves — well-behaved
Types of preferences
Not all preferences look the same. Here are the four canonical types you must recognise:
Perfect substitutes. You are always willing to swap a fixed number of units of one good for a fixed number of units of
the other. Example: two brands of otherwise identical bottled water. If one unit of brand A always equals one unit of
brand B in your mind, the ICs are straight lines with a constant slope.
𝑢(𝑥! , 𝑥" ) = 𝑎𝑥! + 𝑏𝑥"
Perfect complements. You only value the goods together in a fixed ratio — like left and right shoes. One left shoe
without a right shoe is worthless. The ICs are L-shaped: extra units of one good, without extra units of the other, add
nothing.
𝑢(𝑥! , 𝑥" ) = min{𝑎𝑥! , 𝑏𝑥" }
7
,Perfect substitutes and complements
Bads and neutrals. A “bad” is something you dislike (pollution, noise). More of it makes you worse off, so you need
compensation in good things to stay equally happy — ICs slope upward. A “neutral” is something you simply do not
care about. Whether or not you have it makes no difference, so ICs are vertical (or horizontal) lines.
Satiation. There is one ideal bundle — a “bliss point” — and any deviation in any direction makes you worse off. ICs
form closed loops around the bliss point, like contour rings around a mountain peak.
Bads, neutrals, satiation
“Well-behaved” preferences
For most of the course we work with preferences that satisfy two extra conditions:
1. “Monotonicity” — more is better. If a bundle has at least as much of every good and strictly more of at least one,
it is strictly preferred. This rules out bads and bliss points in the relevant range.
2. “Convexity” — averages are preferred to extremes. If you are indifferent between bundle A and bundle B, then
any 50/50 mix of them is at least as good. Geometrically, this means ICs are bowed inward toward the origin —
they curve rather than bulge outward.
If 𝑋′ ∼ 𝑋″, then 𝑡𝑋′ + (1 − 𝑡)𝑋″ ≽ 𝑋′ for any 𝑡 ∈ [0,1]
Convex vs non-convex preferences
8
, Convexity captures the idea that people like variety — you would rather have a bit of both goods than a lot of one and
none of the other.
Marginal Rate of Substitution
The “Marginal Rate of Substitution (MRS)” is the slope of the indifference curve at a given point. It answers the
question: how many units of good 2 are you willing to give up to get one more unit of good 1, while staying equally
happy?
𝑑𝑥"
MRS = |
𝑑𝑥! utility constant
Because giving up good 2 to get good 1 means moving along the IC in one direction, and the IC slopes downward for
well-behaved preferences, the MRS is negative.
A useful way to think about it: if good 2 is just “money for everything else,” then |MRS| is your “marginal willingness
to pay” for one more unit of good 1.
MRS — slope of IC
Diminishing MRS. With convex preferences, as you consume more and more of good 1, you value it less at the margin
— so you are willing to give up less and less good 2 for another unit. The IC gets flatter as you move right. This is called
“diminishing MRS” and it is the geometric expression of convexity.
Utility
From ranking to numbers
Early economists thought utility was a measurable quantity — like temperature. That idea ran into problems: whose
utils do we compare? What does “twice as much utility” mean? The modern answer sidesteps all of that by treating
utility as “ordinal” (about order, not magnitude). A utility function is simply a way to attach numbers to bundles so that
bundles you prefer get higher numbers. Only the ranking matters, not the actual values.
9
INTERMEDIATE MICROECONOMICS
MADE EASY
KOEN HANEGREEFS
VUB
,Table of Contents
CHAPTER 1 — FOUNDATIONS OF CONSUMER THEORY 2
CHAPTER 2 — CONSUMER CHOICE & INDIVIDUAL DEMAND 12
CHAPTER 3 — SLUTSKY EQUATION & MARKET DEMAND 20
CHAPTER 4 — INTERTEMPORAL CHOICE & UNCERTAINTY 27
CHAPTER 5 — TECHNOLOGY (H19) & PROFIT MAXIMISATION (H20) 38
CHAPTER 6 — COST MINIMISATION & COST CURVES 47
CHAPTER 7 — FIRM SUPPLY AND INDUSTRY SUPPLY 56
CHAPTER 8 — PERFECT COMPETITION EQUILIBRIUM (H16) & CONSUMER/PRODUCER SURPLUS
(H14) 63
CHAPTER 9 — MONOPOLY & MONOPOLY BEHAVIOUR 72
CHAPTER 10 — OLIGOPOLY & GAME THEORY 81
1
,Chapter 1 — Foundations of Consumer Theory
The Big Picture
Economics is fundamentally about choices made under constraints. You want many things, but you cannot have
everything — so how do you decide? This chapter lays the groundwork by answering three questions: what can you
afford (the “budget constraint”), what do you actually want (“preferences”), and how do we turn “wanting” into a
number we can do math with (“utility”). Think of it like planning a grocery run: you have a fixed wallet, a list of foods
you like more or less, and you try to walk out as satisfied as possible. Everything in this course builds on these three
ideas.
Scarcity in one picture: you choose among the bundles you can actually afford.
What Is Microeconomics?
Before diving in, a one-paragraph orientation. “Microeconomics” studies how individual people and firms make
decisions — how much to buy, how much to produce, what price to charge. It is the study of choice under constraints.
Macroeconomics, by contrast, zooms out to look at entire economies (think GDP or inflation). Micro is the foundation:
if you understand individual decisions, you can build up to the big picture.
Three tools appear over and over in this course:
• “Constrained optimisation” — pick the best option you can, given limits (e.g., a budget). This is the engine of
every consumer and firm problem.
• “Equilibrium analysis” — find the state where everyone is happy with their choice and nothing changes on its
own.
• “Comparative statics” — ask “what happens if one thing changes?” (e.g., if prices rise, how does behaviour
shift?).
2
,One big assumption runs throughout: people are “rational”, meaning they choose what they most prefer, given what
they know. This is a simplification — real humans forget things, get tired, and follow habits. But it gives us a useful
benchmark. Deviations from rationality are interesting precisely because we have a clear baseline to compare against.
The Budget Constraint
What it means in plain English
You have a fixed amount of money (your “income”) and you want to buy two goods. You cannot spend more than you
have. The collection of all affordable combinations is called the “budget set”, and the edge of that set — the
combinations that spend your entire income — is the “budget line”.
The idea in math
Let 𝑥! = units of good 1, 𝑥" = units of good 2, 𝑝! = price of good 1, 𝑝" = price of good 2, and 𝑚 = your income (money).
You can afford any bundle where total spending does not exceed income:
𝑝! 𝑥! + 𝑝" 𝑥" ≤ 𝑚
The budget line is the boundary — every euro is spent:
𝑝! 𝑥! + 𝑝" 𝑥" = 𝑚
Rearranging to get 𝑥" on its own (so we can draw it):
𝑚 𝑝!
𝑥" = − 𝑥
𝑝" 𝑝" !
#
This is just a straight line. The intercept on the vertical axis ( ) is how much of good 2 you could buy if you spent
$!
$"
nothing on good 1. The slope − tells you how much good 2 you must give up to buy one more unit of good 1 — this is
$!
the “opportunity cost” of good 1.
Worked example. Suppose 𝑚 = 120, 𝑝! = 3, 𝑝" = 6.
• Vertical intercept: 120/6 = 20 units of good 2.
• Horizontal intercept: 120/3 = 40 units of good 1.
• Slope: −3/6 = −0.5. For every extra unit of good 1 you buy, you give up half a unit of good 2.
So the budget line runs from (0, 20) to (40, 0). Any point on or inside that line is affordable.
3
,Budget line and budget set
What happens when income or prices change?
Income rises. If 𝑚 increases (say, you get a pay raise), both intercepts grow proportionally. The line shifts outward,
parallel to itself — you can afford more of everything. The slope does not change because prices are the same.
Income change
Price of good 1 falls. The vertical intercept 𝑚/𝑝" is unchanged (the price of good 2 did not move). But the horizontal
intercept 𝑚/𝑝! moves outward because good 1 is now cheaper. The budget line pivots outward around the vertical
intercept.
4
,Worked example. Using the same numbers (𝑚 = 120, 𝑝" = 6), suppose 𝑝! drops from 3 to 2.
• Old horizontal intercept: 120/3 = 40.
• New horizontal intercept: 120/2 = 60.
• The vertical intercept stays at 20.
The budget line rotates — you can now afford up to 60 units of good 1 instead of 40.
Price change
Taxes, subsidies, and rationing
Governments often interfere with prices. Each intervention reshapes the budget line:
• A “quantity tax” of 𝑡 per unit of good 1 raises its effective price to 𝑝! + 𝑡 → the line pivots inward.
• A “lump-sum tax” takes a fixed amount from income regardless of what you buy → the line shifts inward in
parallel (slope unchanged).
• A “quantity subsidy” lowers the effective price → the line pivots outward.
• “Rationing” caps how much of a good you can buy → the budget set gets a chunk cut off, creating a kink or a flat
segment.
5
,Quantity tax above threshold
A useful shortcut: multiplying all prices and income by the same number changes nothing. Only relative prices (the
ratio 𝑝! /𝑝" ) and real income (what you can actually buy) determine your options. This is sometimes called the
“numéraire trick” — you can always set one price equal to 1 to simplify the math.
Preferences
Ranking bundles
Before buying anything, a consumer must know what they want. We model this by assuming they can rank any two
“bundles” (combinations of goods). Three symbols capture the language of ranking:
• 𝑋′ ≻ 𝑋″ means bundle 𝑋′ is strictly preferred to 𝑋″ (you would always choose 𝑋′).
• 𝑋′ ∼ 𝑋″ means you are “indifferent” — equally happy with either.
• 𝑋′ ≽ 𝑋″ means you weakly prefer 𝑋′ (at least as good).
For this ranking to be logically consistent, we need three properties:
1. “Completeness” — you can always compare any two bundles. You never shrug and say “I have no idea.”
2. “Reflexivity” — any bundle is at least as good as itself. (Obvious, but necessary for the math.)
3. “Transitivity” — if you prefer A to B and B to C, you prefer A to C. Without this, a clever seller could cycle you
through trades and drain your wallet forever — the so-called “money pump.”
6
,Indifference curves
An “indifference curve (IC)” is the set of all bundles that make you equally happy — you are indifferent between all of
them. Draw good 1 on the horizontal axis and good 2 on the vertical axis. Each IC is a curve on that graph.
Two ICs can never cross. Why? Suppose they did cross at point A. Then bundles on IC1 and on IC2 both pass through
A, which would force you to be indifferent between a bundle on IC1 and one on IC2 — but the whole point of having two
separate curves is that they represent different levels of satisfaction. A crossing contradicts transitivity.
Indifference curves — well-behaved
Types of preferences
Not all preferences look the same. Here are the four canonical types you must recognise:
Perfect substitutes. You are always willing to swap a fixed number of units of one good for a fixed number of units of
the other. Example: two brands of otherwise identical bottled water. If one unit of brand A always equals one unit of
brand B in your mind, the ICs are straight lines with a constant slope.
𝑢(𝑥! , 𝑥" ) = 𝑎𝑥! + 𝑏𝑥"
Perfect complements. You only value the goods together in a fixed ratio — like left and right shoes. One left shoe
without a right shoe is worthless. The ICs are L-shaped: extra units of one good, without extra units of the other, add
nothing.
𝑢(𝑥! , 𝑥" ) = min{𝑎𝑥! , 𝑏𝑥" }
7
,Perfect substitutes and complements
Bads and neutrals. A “bad” is something you dislike (pollution, noise). More of it makes you worse off, so you need
compensation in good things to stay equally happy — ICs slope upward. A “neutral” is something you simply do not
care about. Whether or not you have it makes no difference, so ICs are vertical (or horizontal) lines.
Satiation. There is one ideal bundle — a “bliss point” — and any deviation in any direction makes you worse off. ICs
form closed loops around the bliss point, like contour rings around a mountain peak.
Bads, neutrals, satiation
“Well-behaved” preferences
For most of the course we work with preferences that satisfy two extra conditions:
1. “Monotonicity” — more is better. If a bundle has at least as much of every good and strictly more of at least one,
it is strictly preferred. This rules out bads and bliss points in the relevant range.
2. “Convexity” — averages are preferred to extremes. If you are indifferent between bundle A and bundle B, then
any 50/50 mix of them is at least as good. Geometrically, this means ICs are bowed inward toward the origin —
they curve rather than bulge outward.
If 𝑋′ ∼ 𝑋″, then 𝑡𝑋′ + (1 − 𝑡)𝑋″ ≽ 𝑋′ for any 𝑡 ∈ [0,1]
Convex vs non-convex preferences
8
, Convexity captures the idea that people like variety — you would rather have a bit of both goods than a lot of one and
none of the other.
Marginal Rate of Substitution
The “Marginal Rate of Substitution (MRS)” is the slope of the indifference curve at a given point. It answers the
question: how many units of good 2 are you willing to give up to get one more unit of good 1, while staying equally
happy?
𝑑𝑥"
MRS = |
𝑑𝑥! utility constant
Because giving up good 2 to get good 1 means moving along the IC in one direction, and the IC slopes downward for
well-behaved preferences, the MRS is negative.
A useful way to think about it: if good 2 is just “money for everything else,” then |MRS| is your “marginal willingness
to pay” for one more unit of good 1.
MRS — slope of IC
Diminishing MRS. With convex preferences, as you consume more and more of good 1, you value it less at the margin
— so you are willing to give up less and less good 2 for another unit. The IC gets flatter as you move right. This is called
“diminishing MRS” and it is the geometric expression of convexity.
Utility
From ranking to numbers
Early economists thought utility was a measurable quantity — like temperature. That idea ran into problems: whose
utils do we compare? What does “twice as much utility” mean? The modern answer sidesteps all of that by treating
utility as “ordinal” (about order, not magnitude). A utility function is simply a way to attach numbers to bundles so that
bundles you prefer get higher numbers. Only the ranking matters, not the actual values.
9
