System Dynamics Approach to Teaching Supply and Demand: Preliminary Research

8/16/2019 System Dynamics Approach to Teaching Supply and Demand: Preliminary Research

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System Dynamics Approach to Teaching Supply and

Demand: Preliminary Research

• System dynamics

• Supply and demand

• Goal of the paper

• Methodology

• Results

• Conclusion



System dynamics

• J. W. Forrester - 70es of the 20th century

• System dynamics - method used for understanding and modelling the

long-term behaviour of complex systems with feedback over time

• System dynamics - simulation method used to model a portion ofreality in a controlled setting and reproduce the behaviour of social,

economic or political systems

• System dynamics models are widely used for modelling social systems

due to many unpredicted factors and situation

The main advantage of using system dynamics model is the analysis of

the given results after making decision



Supply and demand

• The market is in equilibrium when the products are supplied at a rate equivalent to thedemand

• Oscillations occur when supply or demand changes from equilibrium

• The price could be affected by the inventory which is determined by the manufacturer

• Supply and demand are not static models - depend upon many different factors and are

part of dynamic models

Using system dynamic models in presenting and understanding supply and

demand to students is very useful since influence of long-term impact of

particular decisions to the system behaviour can be demonstrated

Demand - rate at whichconsumers are ready to

buy a product

Supply - quantity of products offered at particular price



Goal of the paper

• Goal of the paper is to discuss usage of system

dynamics in modell ing supply and demand , based on

the research of Whelan and Msefer , “Economic supply

& demand”, Prepared for the MIT System Dynamics inEducation Project, MIT, 2003

In our paper we shall discuss the model, its baseline behaviour, and

conduct three experiments with demand increase, changes in inventory

desired coverage and changes in price change delay



Methodology - System Dynamics Model of Supply and Demand

• System dynamics models - stocks, flows,

auxiliary variables and constants

• Model dynamic behaviour is the result of the

accumulation of flows in stocks. Stocks

accumulate or deplete over time, and a flow is

the rate of change in a stock.

• For example, inventory is increased by

the supply, and depleted by the shipment

of goods from the warehouse. However,

supply depends on the normal supply

(that is constant), and by the effect of

price on supply (that is auxiliary

variables)

Inventory

supply shipments

demand

effect ofprice on demand

NO RMAL D EMA ND

Price

change in price

pri ce ratioINITIAL PRICE

effect ofpriceon demand

lookup

PRICE CHANGE DELAY

effect of invent ory on p rice

effect of inventory on pri ce look up

desired inventory

DESIRED INVENTORY COVERAGE

inventory ratio

effect of price on sup ply

effect ofpriceon supply

lookup

NO RMAL SUP PL Y

<price ratio>

desired price

• System dynamics model of supply and demand is presented at the Figure, which depicts the dynamic

relation of demand and supply determined by the inventory and price

• The model consists on the two stocks: Inventory and Price; Inventory is the stock of produced items in

the company's warehouse, and Price represents the current price of the items on the market



Methodology - Experiments with the Model

•Experiments are prepared according to the Whelan and Msefer (2003), MIT, Road Maps programme

• The contribution of the paper is that we have presented the model to the students and asked

them to give their comments on the understanding of the supply and demand model

• Two groups of 10 students each were examined:

• First group was exposed to the supply and demand teaching using the S-D curves model, and the

second group was exposed to the system dynamics model of supply and demand system• Students were asked to estimate their perceived understanding regarding the changes in supply and

demand and two groups of student’s perceptions regarding the future behaviour (reaching

equilibrium, value of equilibrium, and oscillation) of the supply and demand were compared.

• Three experiments were used:

• 1st Experiment will examine what will happen if demand increases permanently for 10 items per

week

• 2nd Experiment was conducted by changing the desired inventory coverage, desired inventorycoverage was set to the 2, 4 and 6 weeks, and its impact to the inventory is commented

• 3rd Experiment was conducted by changing the price change delay to the 5, 15 and 30 weeks, and its

impact to the price was commented

• Model behaviour was predicted using Vensim software



Results - Experiment with Increase in Demand

•1

st

Experiment was conducted with the permanent increasein demand per 10 items per week

• The model behaviour:

• If demand increases permanently for 10 items per

week, new equilibrium value for price is $16.97, and

equilibrium value for demand is 61.36 items per week

• Therefore, equilibrium value for inventory is 245.44

items, and it is four times larger than demand because

desired inventory coverage is still 4 weeks

• Before inventory reaches equilibrium value it will

exhibits sustained oscillations

Behavior of inventory and price

400 shirt

20 $/s hirt

250 shirt15 $/s hirt

100 shirt

10 $/s hirt

2

2

2

2 2 2 2 2 2 2 2 2 2

1

1

1

1

1 1 1 1 1 1 1 1 1

0 30 60 90 120 150 180

Time (Week)

Inventory : Current shirt1 1 1 1 1 1 1 1 1

Price : Current $/shirt2 2 2 2 2 2 2 2 2 2

Among 10 students that were exposed to thesupply and demand teaching using the

S-D curves model, only 3 predicted that the

new equilibrium value will be higher than the old one

and that oscillations will occur, and 7 did not predict

any changes in equilibrium value

Among 10 students that were exposed to the

system dynamics model of supply and

demand, all of them predicted future

oscillations and new equilibrium;

however, only 6 students predicted

that exact value of the new

equilibrium value



Results - Experiments with Desired Inventory Coverage

Graph for Inventory

400

300

200

100

0

3

3

3

33

3 3 3 3 3 3 3 3 3

2

2

22

2 2 2 2 2 2 2 2 2 2 2

1

1

11

1 1

1 1 1 1 1 1 1 1 1

0 20 40 60 80 100 120 140 160 180 200

Time (Week)

Inventory : Current shirt1 1 1 1 1 1 1 1 1

Inventory : desired invent. coverage = 6 weeks shirt2 2 2 2 2

Inventory : desired invent. coverage = 2 weeks shirt3 3 3 3 3

• 2nd Experiment was conducted by changing the desired

inventory coverage to the 2, 4 and 6 weeks • The model behaviour:

• Value of desired inventory coverage influences

inventory equilibrium level, amplitude of

oscillations, and period of oscillations

• For shortest desired inventory coverage, inventory

equilibrium level is lowest, amplitude of

oscillations is smallest, and period of oscillations

is shortest

• For longest desired inventory coverage opposite

occurs


S-D curves model, only 2 predicted that the new

equilibrium value will be higher than the old one and

that oscillations will occur, and 8 did not predict any

changes in equilibrium value.


system dynamics model of supply anddemand, all of them predicted future

oscillations and new

equilibrium; however, only 3

students predicted that exact value

of the new equilibrium value.



Results - Experiments with Price Change DelayGraph for Price

20

17.5

15

12.5

10

3

3

3

3

3

3

33

3 33 3

3 3

2

2

2 2 2 2 2 2 2 2 2 2 2 2

1

1

1

1

11 1 1 1 1 1 1 1 1 1

0 20 40 60 80 100 120 140 160 180 200

Time (Week)

Price : price change delay = 15 weeks $/shirt1 1 1 1 1 1

Price : price change delay = 5 weeks $/shirt2 2 2 2 2 2

Price : price change delay = 30 weeks $/shirt3 3 3 3 3


S-D curves model, only 2 predicted that the new

equilibrium value will be higher than the old one and

that oscillations will occur, and 8 did not predict any

changes in equilibrium value


system dynamics model of supply anddemand, all of them predicted future

oscillations and new equilibrium;

however, only 1 student predicted

that exact value of the new

equilibrium value

•

3

rd

Experiment was conducted by changingchanging the price change delay to the 5, 15 and

30 weeks

• Model behaviour:

• Therefore, when price change delay is

shortest, system will reach equilibrium in

shortest time, and period of oscillations

would be shortest• Opposite happens when price change delay

is longest



• Students were asked to estimate

perceived understanding on the scale

from 1 to 10 (1-do not understand at all; 10-

undrstand completely)

• Average grade of the perceived

understanding of the first group of

students was 4.6 with standard deviation of2.8 (S-D curves model)

• Average grade of the perceived

understanding of the second group of

students was 7.3 with standard deviation of

3.1 (system dynamics model of supply and

demand)• T-test was conducted in order to compare

means, and the difference was statistically

significant at the 10% level (t=2.0439; p-

value=0.0559).

Results - Comparing the Perceived Understanding of Students

• Students were asked to estimate

satisfaction wi th the teaching on the

scale from 1 to 10 (1-do not understand at all;

10-undrstand completely)

• Average grade of the perceived satisfaction

of the first group of students was 6.3 with

standard deviation of 3.2 (S-D curves model)

• Average grade of the perceived satisfaction

of the first group of students was 6.8 with

standard deviation of 4.1 (system dynamics

model of supply and demand)

• T-test was conducted in order to compare

means, and the difference was notstatistically significant (t= 0.3040; p-

value= 0.7646).



Conclusion

In this paper we have investigated the possible usage of system

dynamics models to increase understanding of the supply and demand

dynamic behaviour by the economics students …

Students that were exposed to the static teaching of supply and demand demonstrated alower ability to predict the future behaviour of supply and demand , compared to the students

to whom the system dynamics model was explained - however, there was no statisticallysignificant difference according to their satisfaction with the teaching process

Our results are in line with the previous research of other authors that demonstrated the benefits of the usage of system dynamics teaching for the understanding of dynamic

phenomena

Practical implications of our research are in the field of enhancing the static approach toteaching of supply and demand with the system dynamics modelling; in order to gain moregeneral results, the experiments should be repeated on the larger sample of students



Thank you

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System Dynamics Approach to Teaching Supply and Demand: Preliminary Research