WASET 2016

ICITMC 2016: 18th International Conference on Information Technology,

Modeling and Computing

System Dynamics Approach to

Teaching Supply and Demand:
Preliminary Research
Mirjana Pejic Bach, Jovana Zoroja, Ilko Vrankic
University of Zagreb, Croatia
Faculty of Economics and Business Zagreb, Croatia

February, 15th/16th 2016, Barcelona, Spain

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 of
reality 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

Supply - quantity of
products offered at
particular price

Demand - rate at which

consumers are ready to
buy a product

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

Goal of the paper

Goal of the paper is to discuss usage of system
dynamics in modelling supply and demand, based on
the research of Whelan and Msefer, Economic supply
& demand, Prepared for the MIT System Dynamics in
Education 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

NO RMA L SUP P LY

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)

NO RMA L D EMA ND
Inventory
shipments

supply

demand
inventory ratio

desired inventory

effect of price on supply

effect of price on demand

effect of price
on supply
lookup

DESIRED INVEN TO RY COVERAGE

effect of price
on demand
lookup

INITIAL P RICE
price ratio

<price ratio>

effect of inventory on price

effect of
inventory on
price lookup

desired price

P rice
change in price

P RICE CHAN GE DELAY

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 students 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 inventory
coverage 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

1st Experiment was conducted with the permanent increase

in 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
20

shirt
$/shirt

2
2

250
15

shirt
$/shirt

1
2

100
10

shirt
$/shirt
0

Inventory : Current
Price : Current

30

60

1
2

1
2

90
120
Time (Week)
1

1
2

1
2

1
2

150

1
2

1
2

180

1
2

Among 10 students that were exposed to the

Among 10 students that were exposed to the
system dynamics model of supply and
supply and demand teaching using the
demand, all of them predicted future
S-D curves model, only 3 predicted that the
oscillations and new equilibrium;
new equilibrium value will be higher than the old one
however, only 6 students predicted
and that oscillations will occur, and 7 did not predict
that exact value of the new
any changes in equilibrium value
equilibrium value

shirt
$/shirt

Results - Experiments with Desired Inventory Coverage

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

Graph for Inventory

2

400

300

200

1
3

100

3
3

0
0

20

40

60

80
100
120
T ime (Week)

1
1
1
1
1
Inventory : Current
Inventory : desired invent. coverage = 6 weeks
Inventory : desired invent. coverage = 2 weeks

140

1
2

1
2

160

1
2

1
2

Among 10 students that were exposed to the

Among 10 students that were exposed to the
system dynamics model of supply and
supply and demand teaching using the
demand, all of them predicted future
S-D curves model, only 2 predicted that the new
oscillations and new
equilibrium value will be higher than the old one and
equilibrium; however, only 3
that oscillations will occur, and 8 did not predict any
students predicted that exact value
changes in equilibrium value.
of the new equilibrium value.

180

2
3

200
shirt
shirt
shirt

Results - Experiments with Price Change Delay

Graph for Price

3rd

Experiment was conducted by changing

changing 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

20
2

17.5

15

3
2

2
1

3
2 3 1 2

1 2 3 1 2
1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1
3

1 2 3

12.5
10
0

20

40

60

80
100
120
T ime (Week)

Price : price change delay = 15 weeks

Price : price change delay = 5 weeks
Price : price change delay = 30 weeks

1
2

1
2

140

1
2

160

1
2

1
2

Among 10 students that were exposed to the

Among 10 students that were exposed to the
system dynamics model of supply and
supply and demand teaching using the
demand, all of them predicted future
S-D curves model, only 2 predicted that the new
oscillations and new equilibrium;
equilibrium value will be higher than the old one and
however, only 1 student predicted
that oscillations will occur, and 8 did not predict any
that exact value of the new
changes in equilibrium value
equilibrium value

180

2
3

200
$/shirt
$/shirt
$/shirt

Results - Comparing the Perceived Understanding of Students

Students were asked to estimate
perceived understanding on the scale
from 1 to 10 (1-do not understand at all; 10-

Students were asked to estimate

satisfaction with the teaching on the
scale from 1 to 10 (1-do not understand at all;

undrstand completely)

10-undrstand completely)

Average grade of the perceived

understanding of the first group of
students was 4.6 with standard deviation of
2.8 (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; pvalue=0.0559).

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 not
statistically significant (t= 0.3040; pvalue= 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 a
lower 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 statistically
significant 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 to
teaching of supply and demand with the system dynamics modelling; in order to gain more
general results, the experiments should be repeated on the larger sample of students

Thank you!