-486-
Vescription of Microeconomics by System Dinamic
Kia Yun Guan, SuZhou Institute of Urban Construction and
bnvironmental Protection
Uhen Wan Kang, WuAi Dieset kngine Factory
Abstract
Some principle conceptions in microeconomics are simutated by System
Vinamic ( in briet $.B ) in this article, The simulating of two /undamentat
theories in microeconomics concerned with balanced prices and margin anatysis
leads to some significant conclusions . Most of these conclusions are now in
heated argument in microeconomic field. Uur achievement 1s provided as a test
of the proceeding ideas,
brief introduction to microecoromics
Microeconomics and macroeconomics are two mainstays in the area of modern
economics . fhey both tay emphasis on quantilative anatysing the facial
relationship between economic factors, lhey treat economical retations as
quantitative connection between several variances. This quantitative
connection is closely related to a tradional mathematical tool-difierentiation,
S.D deals with differentiation in microeconomics as difference method. Many
conclusions can be deduced in this way,
It is known to all that microeconomics studies a single economical unit,
and ina quantitative way, it investigates the various economical aclivities
of a single manufacturer,a consumer and prefession and the economical changes
of an occupation or a market, Therefore it is also catted individual analysis.
Since all the researched objects in microeconomics-are handted as a system ,
it contains a great variety of element and subordinate systems. S.U iunctions
and feedbacks as a bridge between these etement and subordinate systems .
According to microeconomical researchers, the relationship between supply ;
demand and prices are primarily studied in microeconomies and microecoromics
starts from dealing with price problems and market thories .
in the market of qoods and the labour market , a consumers family makes
choices based on the different prices of goods . The principle with which
a consumer makes his decision is to obtain the qreatest satistaction from the
quantity and quatity of goods he buys on his Limited income . ihe way in-which
every famity chooses to buy goods necessarily affects various prices of the
goods in the market . Changes of prices in the market become signals for
industrial firms or commercial enterprises to determine their production in
the market of production means , the prices of diverse production means are
varied,
-487-
Microeconomics describes how industriat firms or commercial enterprises
most efficientty produce their products in the greatest. quantity and gain
the greatest intersts.at the least cost of production. The determination
of all these firms or. enterprises inevitably affect the various prices
of means of production and goods in the market ..in turn it influences
the quantitg of numerous products provided for individual families.
from this market , industrial firms and commercial enterprises buy means of
production , and each famity gets its income as a supplier for means ot
production . These families buy qoods and service supplied by the above
industrial firms and commercial enterprises trom this market, thus ‘the choices
made by each family and the determinatons of industry and commerce are shown
through the relation between supply and demand in the market, This relationship
is in harmony with the changes of prices .-The whole system works from the
determinations of industry and commerce . These determinations exert effect on
the prices of means of production and the prices in the market . They further
affect the quantity of productive elements each family can increase, These ,on
the contrary, influences the determinations. of the enterprises . The cause
and result of relationship between these three elements by 5, is shown as
follows,
+ enterprises buying
means of production
f
goods _¢ : family
labour + income
Figure 1,
it is worth mentioning that microeconomics is completely based on’ a
fumdamenial hypothesis, i, e, the principte for the behaviour of the consumer
is to try to satisty himsetf most , buying various goods within the (imitation
of his income, the principle for industrial.enterprises and commercial firms 1s
to seek the greatest quantity of.products or realise the highest productivity
so as to gain the greatest profits . Thus the inftuence of other factors over
the consumer and industrial enterprises is removed . In reality, this inftuence
is unavoidable . lt is displayed in various forms in different social systems,
For. the convenience of our analysis , this quitting 1s a reasonable proximity
to our real economical state .
~488-
The whole model of our microeconomy is mainly developed from prices. It is
divided into subordinate systems of supply and demand, margin analysis, theories
of elasticity etc . These subordinate systems are bridged by prices . Among
these systems , the system of supply and demand is the most important .
Subordinate system of supply and demand
In microeconomics , the relation between supply and demand determines the
prices of products and the quantity of goods sold and bought in the market .
Balance occurs when supply is equal to demand. In this case , the supplier and
the demander are satisfied with their own behavior . The supplier selis out
every product , the demander gains everything he needs . From this , the
adjustment of prices and the ever existing means of awarding and punishing
in the economical system of free markets can be seen. From the demand
viewpoint , the rising of prices hinds the consumption of products and the
development of service . Resources are saved for this reason . On the other
hand , the consumption is stimulated and the running out of resources is
speeded up . From the supply viewpoint, the rising of prices exites production
and service development . vice versa . Their cause and result relation in this
system is seen as fotlows,
supp Ae
demand oF price
Figure 2.
Description of the Laws for supply and demand in microeconomics
taw for demand , provided other factors remain the same, the lower the
price to buy this product is , the more people wish to buy this product ;
the higher the price of this product is , the less people wish to buy it .
law for supply, provided other factors remain the same, the higher the price
of one product is , the more this product is manufactured . and vice verse .
Under the influence of suppy and demand, the prices in the market are adjusted
spontaneously . This influence of the market functions as an "invisible hand”
to reach a balanced price, i, s, the price mentioned above when supply equals
demand , This subordinate model is described by S.D , which regards supply and
demand as level varibles , supply function and demand function as auxiliary
~489-
variables as well . These three auxiliary varibles are fedback from the level
variablos of supply and demand respectively . the brief flow diagram is drawn
as follows ,
fEMAND
SUPPLY
Figure 3, The flow diagram of supply and demand
In this flow diagram , DI and PI represent the increase rate of supply and
demand in a given period ,. DEMAND means level varince of demand and SUPPLY is
level variance of supply . UD symbolises demand satisfaction rate in a given
period and rate of demand realization’. The price is a auxitiary variance.
The randon supply function curve SF=F1(PR) is based on ‘the‘hypothesis of
micro economic theories . Its slope is: necessarily possitive . The random
demand function curue is DF=F2(PR), Its stope is naturally negative, PR is the
variable for price . Their cross point tells the quantity between supply and
demand when the price is balanced . As figure 4, .
-490-
N
(supply and demand)
Balance pint
- Figure 4,
In this model, P=F{CPR) and D=F2(PR) are described by a reference variance
t time.
S=SCt1) : D=D¢ tz)
PREPRCLL) PR=PR¢ L2
According to the traditional relation between supply and demand ,
price=f(d,p,1) satisfactorily describes the relation between cause and result
showm in figure 1 and a batanced price can be deduced if the original numerals
are given . lt is modeled as fotlows,
1,when the supply curve and demand curve are given “different original prices,
the modeling is diverve in time to get balanced prices ..
2, when the sloping rate of the supply curve and the demand curve qo in
opposite directions , the modeting diffuses .
3, Different balanced prices are reached when the modeling is done according
to various supply curves and demand curves , and their adjusting time is
comptetey different,
4, The amount of feedback greatly affects balanced prices and adjiusting time.
5, This modolt is an ideal microeconomic model which has removed the influence
of many human factors existing in the subordinate systems . such as salaries ,
price control, distributed supply , supplementary production ,; preferential
tariff etc, these factors may come to be considered in the constant perfection
of the model, The fottowing can be concluded from the modet,
~491-
1, The supply curve and the demand curve play an important part in the
formation of balanced prices , So statisticians are tasked to try their best
their to reach the supply and demand curve of one product .
2, The increase of production and demand has a direct effect on the formation
of balanced prices. So steady increase of production and demand is required on
a small scale. stability of balanced prices is harmed if a great change occures
in either of these two factors.
3, It is necessary to reach batanced prices when production and demand is
fedback , This has provided a theoretical foundation for our economic system
characterised by its complete planning to complicated market economic system .
4, To reach and maintain balanced prices is determined by the relationship
between suppliers and demanders . Kor this’ reason to keep balanced prices is
realized by harming this relationship resutted from governmental behaviour
such as subsidy tax etc .
§, The final formation of balanced prices needs certain adjusting time . The
longer the adjustment of the modeling is , the less stability it’ reflects, and
vice versa .
Subordinate system of margin analysis
In economic activity , the increment produced by one economic quantity is
called margin . The margin number is qenerally regarded as derivative . The
course of the solution and calculation of this margin number is catied margin
analysis The result of the margin anatysis is described by the relationship
between cost and income .
Two different cause and result relationships can be deduced from the cause
and result relationship , i, ‘e, cost and income,
+ —_ +, productivity
( | ( a
income <——-——_—-- cost income <——_______———- cost
Figure 5,
Thus the two cause and result relationships can be seen from the cost and
income relationship . The flow diagram of this system.is drawn as follows ,
-492-
PRODUCTION
increase rate rate of meetting
the demand
matgin
number
price of
market
the function
margin cost
varable
pure cos
profit
margin
sale
fixed
cost
the most
profit total
cost
Figure 6;
By the simulation of the relationship between compared average cost, average
income and margin cost and margin income , the influence on the model is seen
when market prices are constant or varied . The significance of the modet
lies on its direct description of the following two aspects .
i,why is it the condition for an enterprise to gain the highest interest when
its margin income is equal to its margin cost ?
2, It provides the relibility for the determination of an enterprise when
prices change or remain the same
subordinate system of elasticity analysis
Previously elasticity was mentioned briefly . its habitual bihavior in the
model S.D is analysed in detail from a microeconomic point . Elasticity means
aspects of reaction when the ratio of one variance to another is changed . it
is mathematically defined as follows ,
-493-
xzRgQ Variance] %
Elaticity= :
van Variance2 9%
For the convenience to describe the scale of elasticity it is divided into
five groups .
1, when E>>], it is named infinite elasticity.
2, when E>1, it is described elastic.
3, when E=1, its datum of elasticity equals 1 (- critical elasticity )
4, when Ect, it is stated lack of elasticity.
5, when E<<j, it-is not elastic at all. ”
It is exceptional when E<§, This case is normally. not allowed to take place.
The ratio of two concrete variances-supply and price is called supply
elasticity , demand and price demand elasticity . Besides there is supply and
demand elasticity , demand and income elasticity etc . supply elasticity and
demand elasticity are analysed in this model in reference to Figure 2.
Supply elasticity tells the relative ratio between supply and price . it is
mainly used to show the reaction of quantitative supply of one product when
the prices of labour or investment are changed . .
Qi represent original supply , YZ is final supply . P1 tell original price
degreel, P2 is final price degree2. KCsupply) is so called desired supply
elasticity , Their cause and resutt relationship, i, e, ECsupply) and
quantitative supply is shown in the following
Qe = Ut
a
“ECsupply) = ——————_
pa - Pi
Pi
in S.D, the variables Supply.k are present data, Smooth(Suppty.k, DT) are the
initial data after variance Supply is . smoothened . fieneratly DT, means one
unit Length .
Ecsupply) in S.D is descripted as follows ,
Supply.K - Soomth¢ Supply.K , DT)
Supply.K
Es
n
Price.K - Soomth¢. Price.K , DT)
Price.K
DT is simutated unit time step length,
~494—
Q1 represents orignal supply , (2 is final supply . Pi telts original price
degreel , P2 is final price degree2 . ECsupply) is so called desired supply
elasticity, Their cause and result relationship, i,e, E(supply) and quantitative
supply is shown in the following Figure ,
supply supp Ly
~
\ + 4.
elasticity elasticity
/ price 7
KCsupply) > 1
Figure 7,
Demand elasticity exposes the relatively quantitative ratio between demand
and price , it measures the quantitative demand of one product and adaptation
of tabour and income elementary factors elemantary factors when its price
is changed .
Qi expresses the original quantitative demand , 2 the final quantitative
demand, P{ states the original price level , P2 is the final price level, Kd
telts demand elasticity . The cause and resutt relationship between Kd and
demand is shown in the following figure 8,
» -495-
+
demand at .
elasticity elasticity.
+ ee + price ,
Ecdemand) > | " KCdemand) << 1
The demand elastricity has nothing to
do with demand in abouve figure
Figure 8,
When supply elasticity and demand elasticity are, added as variables to the
flow diagram below of the subordinate system to expose .
SUPPLY
Figure 9,
-496-
the relationship between supply and demand, it tells different stimulation
on demand and supply caused by the feedback of elastic adjustment . .
The model simulates habitual behavior of this system under different .
elasticities . The greater elasticity can be read . if the system is very
unstable and smaller elastic system changes ‘stowly, it means the Lack of
economic motivity . But it is very difficult to measure practical elasticity .
The coefficient of elasticity can be reached from a large number of statistic
data . These data are required to be wide and exact . This is just the direct
result of the simulation of this model.
Because of the urgency, the simulation of macroeconomics by S.D is Left
uncompleted . As far as the simulating of microeconomics ,it is far from its
perfection . We hope more personnel may go in for the study of economic
theories, We are going to study macroeconomics by S.D and perfect the study of
microeconomics.
