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Budget Line Definition:  The  Budget Line , also called as  Budget Constraint  shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level. We know that the higher the indifference curve, the higher is the utility, and thus, utility maximizing consumer will strive to reach the highest possible Indifference curve. But, he has two strong constraints:  limited income and given the market price of goods and services . The income in hand is the main constraint (budgetary) that decides how high a consumer can go on the indifference map. In a two commodity model, the budgetary constraint can be expressed in the form of the budget equation: P x  . Q x  + P y  . Q y  =M Where, P x  and P y  are the prices of commodity X and Y and Q x , and Q y  is their respective quantities. M= consumer’s money income The Budget equation states that the cons...

Indifference curve An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction (utility) to the consumers. Since any combination of the two goods on an indifference curve gives equal level of satisfaction, the consumer is indifferent to any combination he consumes. Thus, an indifference curve is also known as ‘equal satisfaction curve’ or ‘iso-utility curve’. On a graph, an indifference curve is a link between the combinations of quantities which the consumer regards to yield equal utility. Simply, an indifference curve is a graphical representation of indifference schedule. The table given below is an example of indifference schedule and the graph that follows is the illustration of that schedule. Table: Indifference schedule Combination Mangoes Oranges A 1 14 B 2 9 C 3 6 D 4 4 E 5 2.5 Figure: Graphical representation of indifference curve Assumptions of indifferenc...