modeling business production processes and communication
 
National Economics Standards (Student Ages 5–18)1

One of the real values of System Dynamics (SD) modeling is the accessibility of the model design process. Because the software is visual, because full words or phrases can be used to identify the individual icons that represent a component in the model structure, because dependencies of one part upon another can be explicitly displayed, this type of model building accessible to a WIDE range of students.

There are a large number of models that apply to the economics curriculum. Of course there are the standard models dealing with interest rates and checking/savings accounts, but there are also supply/demand/price models, supply chain models, market competition models, models of innovation diffusion, unemployment/urban dynamics models, resource depletion models, among others, that are within the grasp of a high school audience. It is also possible to add segments to model diagrams that represent proposed policy solutions. These policies can then be tested to determine whether they have a chance to provide the long-term solution desired. They also have the potential to uncover undesirable side-effects of policies that seem to provide quick solutions in the short-term. Providing experiences for students that encompass this type of analysis will have long-term benefit.

Within the discipline of economics many systems are governed by feedback mechanisms. SD modeling has as its fundamental approach the study of how feedback affects the behavior of complex systems. It is a valuable ‘new’ tool to enhance learning in the economics classroom.

While there may not be models already created for every standard listed below, it would be possible to create models that will enhance the learning experience in these areas. 2

   

Scarcity
• Productive resources are limited

Marginal Cost/Benefit
• Effective decision-making requires comparing the additional costs of alternatives with the additional benefits.

Allocation of Goods and Services
• Different methods can be used to allocate goods and services.
• People respond predictably to positive and negative incentives.

Role of Incentives
• Different methods can be used to allocate goods and services.

Gain from Trade
• Voluntary exchange occurs only when all participating parties expect to gain.

Specialization and Trade
• When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.

Markets—Price and Quantity Determination
• Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Role of Price in Market System
• Prices send signals and provide incentives to buyers and sellers.

Role of Competition
• Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy.

 

Role of Interest Rates
• Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses.

Role of Resources in Determining Income
• Income for most people is determined by the market value of the productive resources they sell.

Profit and the Entrepreneur
• Entrepreneurs are people who take the risks of organizing productive resources to make goods and services.

Growth
• Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.

Role of Government
• There is an economic role for government in a market economy whenever the benefits of a government policy outweighs its costs.

Using Cost/Benefit Analysis to Evaluate Government Programs
• Costs of government policies sometimes exceed benefits.

Macroeconomy—Income/Employment, Prices
• A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy.

Unemployment and Inflation
• Unemployment imposes costs on individuals and nations.

Monetary and Fiscal Policy
• Federal government budgetary policy and the Federal Reserve System’s monetary policy influence the overall levels of employment, output, and prices.

     
Some Simple Economics Models
     

Interest Rate model

 

Supply/Demand/Price model




1 This sub-list of standards in this document was obtained from the full list of national standards.
2 There are several universities that offer classes in economics using a system dynamics modeling approach, and others that incorporate many economics topics within the study of system dynamics. Some of those universities include Worcester Polytechnic Institute/System Dynamics Department in Worcester, MA, USA, University of Bergen/System Dynamics Department, Bergen, Norway, and Massachusetts Institute of Technology/Slone School of Management, Cambridge, MA, USA.



 

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