Simulation is a numerical technique for conducting experiments on a digital computer, which involves certain types of mathematical and logical models that describe the behavior of business or economic system or some component thereof over extended period of time.

Simulation deals with both abstract and physical models. Some simulation with physical and abstract models might involve real  people. Two types of simulation involving real people are-

  1. Operational gaming
  2. Man-machine simulator

Merits of Simulation

  1. In cases where obtaining data is either impossible or very expensive, simulation is used.
  2. The observed system may be too complex that it cannot be described by a mathematical model.
  3. Even though a mathematical model may be formed to describe the system, it may not always be possible to find a straight forward analytical solution.
  4. It may either be impossible or very costly to perform experiments to validate a mathematical model describing the system.

Demerits of Simulation

  1. Simulation is indeed invaluable and very versatile tool  in those problems where analytical techniques are inadequate. Although  being an impressive technique,  it provides only statistical estimates rather than exact results and it only compare alternatives rather than generating the optimal one.
  2. Simulation is also a slow and costly way to study a problem. It usually requires a large amount of time and great expense for analysis and programming.
  3. Finally simulation deals only numerical data about the performance of the system and sensitivity analysis of the model parameters is very expensive.