Teaching economics outside the box: using the circular-flow diagram to indicate efficient resource allocation in intermediate microeconomics

Abstract

This paper uses the circular-flow diagram to illustrate the efficiency of resource allocation at market equilibria. This diagram not only depicts the circulation of goods and money within a market economy but also suggests the efficiency of resource allocation at market equilibrium. However, economics instructors usually invoke the Edgeworth box diagram to demonstrate efficient resource allocation. Therefore, for an intermediate economics class, this paper proposes a simple method to describe the efficiency of resource allocation: the circular-flow diagram.