The main purpose of this paper is to study the dynamic behavior change of Shanghai's industrial structure. Shanghai's industry is facing a severe situation now. In one hand, the industry is required to make adjustments in its structure and distribution according to Shanghai economic development strategy; in the other hand, its ageing technology and structure of products, together with the shortage of energy and raw material, result in decline of profits in industrial enterprises and “landslip” of government revenue. Therefore, how to adjust the structure of Shanghai's industry reasonably is becoming an urgent task. With the aid of industrial development history of western developed countries, this paper analyzes the reasonable development of industry from four aspects, creates a system dynamics model to simulate the dynamic change of city's industrial structure and tests its validate. At last, the paper uses this model to analyze the trend of Shanghai industrial production and studies several problems in industrial economy, such as; selecting the leading industrial department of the city; allocating funds reasonably; using energy and raw material efficiently and affecting the technology, pollution and transportation on industry. In policy test, the paper proposes a series policies to authorities responsible for industry development for reference.