ECONOMIC SUPPLY & DEMAND

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4 D-43881. ABSTRACTThe main purpose of this paper is to discuss supply and demand in the frameworkof system dynamics. We first review classical supply and demand. Then we look at howto model supply and demand using system dynamics. Finally, we present a few exercisesthat will improve understanding of supply and demand and help improve systemdynamics modeling skills.
D-4388 52. INTRODUCTIONThis paper emerged as an attempt to use system dynamics to model supply 1 anddemand. Classical economics presents a relatively static model of the interactions amongprice, supply and demand. The supply and demand curves which are used in mosteconomics textbooks show the dependence of supply and demand on price, but do notprovide adequate information on how equilibrium is reached, or the time scale involved.Classical economics has been unable to simplify the explanation of the dynamicsinvolved. Additionally, the effects of excess or inadequate inventory are often notdiscussed.In the real world, the market price is affected by the inventory of goods held bythe manufacturers rather than the rate at which manufacturers are supplying goods. 2 Ifthe manufacturers are supplying goods at a rate equal to the consumer demand, the staticclassical theory would propose that the market is in equilibrium. However, what if thereis a tremendous surplus in the store supply rooms? The manufacturers will lower theprice and/or decrease production to return inventory to a desired level.This paper introduces a model that incorporates elements from classicaleconomics as well as several real-world assumptions. This model will be used toexamine some of the interactions among supply, demand and price.1 Supply and production are very similar terms and are often used interchangeably.2 Low, Gilbert W. (1974). Supply and Demand in a Single-Product Market (Exercise Prepared for theEconomics Workshop of the System Dynamics Conference at Dartmouth College, Summer 1974)(Department Memorandum No. D-2058). M.I.T., System Dynamics Group.
Page 1 and 2: D-4388 1ECONOMIC SUPPLY & DEMANDbyJ
Page 3: D-4388 3Table of Contents1. ABSTRAC
Page 7 and 8: D-4388 7Demand Limited byability to
Page 9 and 10: D-4388 93.4 Interaction Between Sup
Page 11 and 12: D-4388 11$50DemandSupplyPrice per a
Page 13 and 14: D-4388 134.2 DemandDemandinventorys
Page 15 and 16: D-4388 154.3 SupplyBelow is the sup
Page 17 and 18: D-4388 17increase, it takes larger
Page 19 and 20: D-4388 19Figure 9: Effect on Price
Page 21 and 22: D-4388 21At this point, you may wis
Page 23 and 24: D-4388 235.2 Desired Inventory Cove
Page 25 and 26: D-4388 25The graph below shows the
Page 27 and 28: D-4388 276. SOLUTIONS TO EXERCISES6
Page 29 and 30: D-4388 296.2 Desired Inventory Cove
Page 31 and 32: D-4388 31#8, #9: The graphs below s
Page 33 and 34: D-4388 33effect_on_price = GRAPH(in
Page 35: D-4388 351 : price 2 : desired pric

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