Part C: Market economics

16.17 Introduction

Economic systems in fact have many features common to the conventional dynamic
systems. The economic systems are dynamic in nature because of the fact that the
economic processes are time varying. The economic processes are driven by different
forces such as consumer demand, market supply etc. just like the dynamic processes.
These and many more similarities give the motivation to model the economic
systems by bond graphs. For details see (7)3.

Bond graph technique has been used to model the economic systems. Six different
models depicting the economic situations, with increasing complexity have been
discussed. The most preliminary model consists only of a consumer and an
inventory. This market comes to a halt and hence has no existence soon after the
inventory gets exhausted. The second model takes the presence of supplier into
account. Thus, this market is always dynamic because of the continuous supply from
the supplier. In the third model, the firm has been incorporated. This is the place
where the commodities are manufactured. In the fourth model, the reinvestment in
the firm has been brought into picture. The firm adjusts its reinvestment on the basis
of its sales. The fifth model has studied the concept of substitution effect. That is, the
effect of the price variation of one of the two substitutive goods on the demand of the
other. In the sixth and the last model, the firm has been analyzed and connected to its
input markets. Two input markets have been considered only for simplicity.

In this part we have not discussed modeling of economic systems in details. We

endeavored to create an impression how bond graph models can be developed for
nonenergetic system dynamics once we define an appropriate bond graph
grammatics for such systems.

16.18 Nomenclature

p Unit Price of commodity f Flow of orders

m
 Cash flow E Elasticity of supply or demand

Eij Cross elasticities q Accumulation of orders

 Economic impulse

3
These references are listed at the end of this part
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 536
16.19 Bond graph elements and their representation in economic
systems

The effort variable in economic systems is the Unit Price (Cost/Unit). It is denoted by
p. The flow variable, f represents the flow of orders. The product of the effort and flow
variables gives the power, m  . Here, the product of Unit price and flow of orders is
the cash flow that is taking place (1, 2).

1. R element: It is defined by the functional relationship

p   R f  . (16.12)

A good example of a relation used for Supply or Demand for a single commodity
market is given as

f   p / p0  E . (16.13)

If substitutes are present, then

E11 E12
 p   p2 
f1   1  
p 
 . (16.14)
 p0   0

Demand and supply are considered to be resistive in nature.

2. C element: They are associated with a constitutive relation

q    p , (16.15)

where

t
q t  
 0
f    d  q  0  . (16.16)

A particular constitutive relation is

q  l n  p / p0   . (16.17)

The C element sets the price depending on the in flow of orders between what is
demanded and what is actually produced.
537 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

de 1
.   fD – fs  (16.18)
dt C

i.e flow is the cause and the effort is the effect.

A negative value of q implies an inventory. A positive q on the other hand indicates

an accumulation of unfulfilled orders. The price in the market increases with q as is
shown by the relation above.

3. I element: The I element or the inertia element is defined by the constitutive

relation

  J f, (16.19)

t
where   t    0
p   d      0 (16.20)

A particular relation which nicely describes the investment inertia is

  Jl n f  . (16.21)

Differentiating

df
J  pf . (16.22)
dt

The right side of the equation is cash flow. The rate of change of production is thus
df
proportional to the cash flow. If  1 , i.e., production is raised by one unit, the
dt
cost incurred is J.

4. TF element: It is used in the representation of manufacturing or assembly units

where the inputs are transformed to outputs. Inputs can be labor, capital, raw
materials etc. and output can be automobiles, steel and so forth.

f input   f output , (16.23)

where  represents the modulus of the transformer, finput and foutput are the input and
the output flows respectively.
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 538
5. GY element: It can be used for modeling reinvestment where a firm adjusts its
reinvestment on the basis of its sales. Thus, the flow (sales) is related to effort
(reinvestment).

einput  f output  . (16.24)

6. 0-junction: It is the common effort or the common price junction, i.e., a

marketplace. In a microeconomic situation if a product is identical in all respects to
other products, it has only one price, irrespective of the supplier (perfect
competition). Thus, the 0-junction represents the market of a specific commodity.

7. 1-junction: At this junction, the flow of orders is the same and efforts are added
up. The production firm can be considered as a 1-junction. The same flow i.e order
information, that is taken up by the firm is passed on to individual suppliers, e.g.,
tyres, crankshafts, engines, etc. Each supplier may be a firm by itself. A single order
of car leads to four orders for a tyre. The flows of the tyre and the automobile firm
are related by transformers. The cost of production is the sum of all the commodities
that make up the product.

8. Activated bonds: In bond graphs, activated bonds transfer one way information
only. In many cases the government controls the price in the market without any
transactions of cash (i.e. power). This type of government influence can be visualized
through activated bonds. In addition to that, the activated bonds can be used to
realize feedback. The firm keeps a watch on the sales of its goods and depending on
its sales, it changes its reinvestment.

16.20 Implementing bond graphs for economic systems

A very important fact to be mentioned here is that, the elements of economic system
being nonlinear, the linear R, C, I elements cannot be used directly. They should be
first realized properly which is done in this section.

1. Realization of demand and supply: The nonlinear demand and supply resistors
defined by constitutive relations can be realized as source of flow. This is because,
demand is defined as the flow of orders put by the consumers. Supply, on the other
hand, is the flow of commodities (or negative flow of orders) from the supplier into
the market. Thus, the power direction is towards the junction for demand (since
consumer gives cash) but away from the junction for supplier (since supplier gets
cash).

2. Realization of inventory: It is defined by the difference of the flow of orders from

the consumers and the supply from the supplier, accumulated over time. It is
basically the accumulation of commodities i.e. negative q. This difference i.e. the
539 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

inventory sets the price in the market. Thus, inventory can be represented by a
source of effort. The power direction of this source of effort is away from the junction
confirming the fact that, the inventory consumes revenue.

3. Representation of market: It can be represented by a 0-junction as explained

earlier.

4. Representation of firms: It is the place where the inputs are actually transformed
into products. Each input when transformed must give the same flow of the product.
For example, four tyres get transformed into one car, one engine to one car and so on.
Thus a firm is a 1-junction bonded to different input markets. A supplier faces two
prices viz., the market price and the firm's price, and he sets his supply depending on
the difference of these prices.

5. Realization of production function: In the models to be described, it has been

realized through the Cobb-Douglas Production Function,

o  Ax1 1 x 2
2 . (16.25)

where o is the output, x1 and x 2 the inputs, 1 and  2 are constants.

16.21 Description of models

A. Preliminary model with only one consumer and Inventory

1. About the model A: This is the most preliminary model in which a marketplace (0-
junction) is bonded just to a consumer and inventory. The inventory is setting the
price in the market. Figure 16.21 shows the bond graph of the model.

2. Simulation results for the model A: The market starts with an inventory only
(that is, negative flow of orders). Due to inventory being present the prices are very
low and flow of orders is very high initially. But, as time increases and the inventory
starts getting exhausted the price starts increasing and flow of orders decrease
because of the increase in the price. A very important fact is that for this market the
period of interest is only till the inventory becomes zero, i.e., till all accumulated
goods are exhausted. After the inventory becomes zero, the market has no existence
because of the fact that there are no suppliers present in this market. Figures 16.22(a)
through (c) show the results.
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 540

Fig. 16.21. Fig. 16.22(a)

Fig. 16.22(b)

Fig. 16.22(c)
541 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

B. Model with only consumer and supplier

1. About the Model B: In this case, the market is bonded to the consumer as well as
the supplier. The difference in the flow of orders from the consumer and the supply
from the supplier i.e. unfilled orders or the inventory (negative orders) sets the price.
Fig. 16.23 shows the bond graph of the model.

2. Simulation Results for the Model B: Simulation results show variation of the
variables namely, the price in the market, the flow of orders, the inventory level and
supply with time. Here also, the market starts with a negative flow of orders (or
inventory). Thus the price is initially at its minimum. And then, because of the orders
coming in, the inventory starts getting exhausted and hence, the price increases with
time. This increase in price in turn then causes the decrease in demand. Hence, the
flow of orders (or demand) is found to decrease with time. The supply increases
because, at the increased prices, the supplier would be interested in selling more in
order to maximize his profits.

Fig. 16.23

Fig. 16.24(a)

This is evident when we see the variation of the flow of orders and the supply with
the price in the market. Figures 16.24 (a) through ( f ) show the results.
EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 542

Fig. 16.24(b)

Fig. 16.24(c)

Fig. 16.24(d).
543 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

Fig. 16.24(e).

Fig. 16.24(f)

C. Model with a consumer, supplier and the production facility

1. About the Model C:

This model includes a consumer,

supplier and production facility.
The supplier is represented by the
source of flow linked to the 1-
junction. The 1-junction is bonded
to two 0-junctions, the consumer-
supplier market and the
production market (that is, firm-
supplier market). The supplier
Fig. 16.25.
sets his supply on the basis of the
difference in the prices in these
two markets. The production facility i.e., the firm, is linked directly to a source of
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 544
effort which denotes the cost of inputs required for the production of the output. The
inputs may be labor, machines, capital, land or else. They are not considered
separately in this model and have been represented together by a source of effort
because they give the information of the effort (i.e. cost) for a particular flow (i.e.
output production). Figure 16.25 shows the bond graph of the model.

2. Simulation Results of the Model C:

In this model, variation of the variables namely, price in the consumer market, flow
of orders in the consumer market, supply in the market, inventory level in the
market, and the price set by the production facility with time have been simulated.
The results are shown in Fig. 16.26(a) through Fig. 16.26(e). The results of most of the
items are similar to the results obtained in the previous model. The price set by the
production facility is also found to increase with time.

D. Model with reinvestment incorporated

Fig. 16.27.
1. About the model D: This model also shows the market economic system with
consumer, supplier and production facility (or firm). But, the production facility in
the present model maintains an inventory which sets the price of the commodity in

the supplier-firm market. The most important feature of this system is the
incorporation of the concept of reinvestment. Reinvestment is done on the basis of
sales of the firm. The firm inspects its sales to the suppliers and depending on it the
firm invests to boost up the production further. The reinvestment is done through a
545 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

gyrator. Also, the inputs to which the firm is bonded are together represented by a
source of effort. The source of effort there represents the cost of inputs. Fig. 16.27
shows the bond graph of the model.

2. Simulation Results for the Model D: Both the firm and the market are initially
having inventory. So, when the flow of orders starts coming in, the inventory starts
getting exhausted and the price in the market increases. Hence the supplier increases
his supply at increased market price to get more profits. But the increased supply
from the supplier leads to the exhaustion of the firm inventory which in turn causes
the price of the good in the firm-supplier market to increase. Thus the supply from
the supplier although initially increases under the influence of the market, reaches a
maximum and then starts decreasing under a greater influence of the firm, to
ultimately attain an equilibrium position. This explains the nature of variation of the
supply in the market with the price set by the firm.

The variation of the price in the market with the price set by the firm is also shown. The
market price is seen to increase first and then getting stabilized.

The accumulation of orders in the market initially being negative increases with time,
which is explained by the orders coming in and getting accumulated.

Because of the increase in the price in the market with time, the flow of orders
decreases with time.

The supply in the market increases with time for some time because of the increase of
the price in the market, but it reaches a maximum and then reduces and finally
reaches a steady value. This variation is due to the fact that the supply in the market
is influenced by both market price (having an increasing effect) and price set by the
firm (having a decreasing effect).

The production of the firm initially decreases with time. This is because of the fact that
initially the demand is met by the inventory present in the consumer-supplier
market. But when the inventory starts getting exhausted, then to meet the demand,
the supplier must get the commodity from the firm which leads the firm to increase
its production. But because of the reducing flow of demand, the production of the
firm also has to ultimately attain a steady value.

The price set by the firm is found to increase with time and then ultimately attain
steady value. The price in the market, also as explained increases with time and
stabilizes. Figures 16.28(a) through Fig. 16.28( f ) and Fig. 16.29(a) and (b) illustrate the
results of the model D.
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 546

Fig. 16.28(a).

Fig. 16.28(b).

Fig. 16.28(c). Fig. 16.28(d).

547 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

Fig. 16.28(e). Fig. 16.28(f).

Fig. 16.29(a).

Fig. 16.29(b).

E. Model representation with substitutive goods

1. About the model E: This model is basically made with the reinvestment model as
its building block. It is modeled for two substitutive goods by linking the two
reinvestment models as shown in Fig. 16.30. The concepts of cross elasticities have
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 548
been brought into picture. The price in the market and the demand for each
commodity exerts an influence on the demand for the other product.

2. Simulation Results of the Model E: Simulations have been done for two sets of
direct and cross elasticities.

First Set: E11  E22  0.5 , E12  0.7 , E21  0.4 where the subscripts 1
and 2 refer to the commodities A and B respectively.

Fig. 16.30.

With these set of elasticities, with the increase in price of any commodity, the
demand for the commodity A is found to increase, which is indeed very surprising.
But this can be explained from the examination of the elasticities. A commodity is
subjected to the influence of both the direct and the cross elasticities. While the direct
elasticity is negative, the cross elasticity is positive for substitutive goods. Now in our
present case the cross elasticity of commodity A (E12) with respect to B is greater than
its direct elasticity (E11). Hence, the positive effect of the price (due to E12) on the
demand of the commodity A is more than that of the negative effect (due to E11).
Hence, this surprising result showing the increase in the demand of the commodity
A with price in the market if the other commodity comes. But for the case of
549 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

commodity B, the cross elasticity of B (E12) is less than that of its direct elasticity (E22).
But it is very close to it also. As a result, the demand of the commodity B decreases
for some extent with the increase in the price of any commodity and then increases.

With these set of elasticities the variations of the demand of the two commodities
and the prices with time have also been simulated. Prices vary in a similar fashion.
The demand for the commodity A increases just because of the reason written above.
And for the reasons provided the demand for commodity B first decreases with time
and then increases and ultimately stabilizes. Figures 16.31(a) through Fig. 16.31(f)
show the results for this set of data.

Fig. 16.31(a).

Fig. 16.31(b).
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 550

Fig. 16.31(c). Fig. 16.31(d).

Fig. 16.31(e). Fig. 16.31(f).

Second set: E11  E22  0.5 , E12  0.3 , E21  0.8

This is another set of elasticities for which simulations have been made to study the
impact of the price changes on the demand of the substitutive goods. In this case, the
cross elasticity of the commodity A is less than its direct elasticity. So the influence of
the direct elasticity is more. Hence, the demand for the commodity A decreases with
the increase in the price of the commodity. But, for commodity B, the cross elasticity
of B is more than its direct elasticity. This means, a slight change in the price of the
commodity A or B will result in quick change in the demand for the commodity B.
Hence, with the increase in the price of any commodity, the demand for commodity
B is seen to increase and it ultimately stabilizes without decreasing anywhere
because of the fact that the difference in the cross elasticity and the direct elasticity of
the commodity B is indeed high. We are taking the demand changes of the goods
with respect to changes in the price of any good because of the fact that the prices of
both the commodity are assumed to change identically. Similarly as in the case of the
previous set of elasticity values, in this case also, the time variation of demands of the
two goods and their prices has been simulated. Figures 16.32(a) through Fig. 16.32( f )
show the results for this set of data.
551 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

Fig. 16.32(a).

Fig. 16.32(b).

Fig. 16.32(c). Fig. 16.32(d).

 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 552

Fig. 16.32(e). Fig. 16.32(f).

F. Model with production facility analyzed with input markets

1. About the Model F: In this model, the input markets to which the production
facility i.e. the firm is bonded are explicitly incorporated. In the present model, the
firm is linked (that is, bonded) to two input markets, say, the labor market and the
machine market. The linking has been done, as can be seen through appropriate
transformers. This gives us a command to analyze the inputs properly for the
different variations in the output. Quite naturally, the production function concept
has been utilized for creating the transformers. In this model, the firm is readjusting
its production through reinvestment (on the basis of the sales). For this market, then,
the main problem is to find out the inputs for the given output. In the present
market, there are two inputs, labor and machines. So, to get a particular output, there
are different possible combinations of the inputs. But, we are interested in the
optimal combination of the inputs. Thus, we put a price constraint in the junction of
the firm where it is connected to the input markets. Using this price constraint and
the known output, we get a relation between one of the inputs and the output. It is
seen that that this equation has to be solved using iterative methods, such as the
Newton-Raphson iterative method. We have indeed incorporated this method in solving
for the inputs. Fig. 16.33 shows the bond graph of the model F. The price constraint
that has been put in the junction linking the firm to the input markets is given as

Cash through firm (after investment) = Cash for input1 + Cash for input2.

 1 
 
elasticityoffirm 
e f f ort firm  p0 flowfirm

2. Simulation Results for the Model F: The variations of the inputs (labor and the
machine) with time are simulated. By changing certain parameters the change in the
variations are also noted. The variations in the demand, supply, price in the market,
and the production of the firm are seen as usual with respect to time. Their variations
are seen to be similar to the pervious models. Hence the nature of their variation can
553 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

be easily explained. The variations of the labor and machine with time show that the
labor increases with time while the machine first decreases and then increases and
ultimately both of them are seen to stabilize. The increase in the labor with time is
due to the fact that the production function shows the labor to have a positive effect
on the output. Therefore, the increase in labor accounts for the increase in the
production. According to the production function, if the labor increases, then the
machine should decrease for a particular amount of production. This is purely
mathematical in nature although in practical situations, this is not mandatory. The
results have been shown in Fig. 16.34(a) through Fig. 16.34(f).

Fig. 16.34(a). Fig. 16.34(b).

Fig. 16.34(c). Fig. 16.34(d).

 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 554

Fig. 16.34(e).

Fig. 16.34(f).

G. Overview of the Results:

The results of the simulations conducted after the modeling of the economic systems
using bond graphs have been studied. The results seem to agree with the trend
usually found in the actual real time economic systems.

For the purpose of the modeling the economic systems had to be realized
mathematically. These mathematical relationships are some well known empirical
formulae such as Cobb-Douglas equation (4). But there are some inherent drawbacks in
using these equations directly and they need some conditioning before use. For,
example, the production function in its mathematical form says that the production
increases continuously with the increase in labor or machine. But that may not be
indeed the case in real world phenomena. In fact, the concept of Marginal product
says the increase in the output for a unit increase in the input is decreasing. This is
the famous Law of diminishing Marginal Product (5). Since, this was the first attempt to
build up precise models for the study of {socio-economic} systems, we sought
simplicity. So, different factors such as time factors (these equations may take
different forms with time), psychological factors (increase in input need not
555 MODELING AND SIMULATION OF ENGINEERING SYSTEMS THROUGH BOND GRAPHS

necessarily always result in the increase in the output), and many more should be
incorporated to build up equations almost close to actual behavior.

16.22 Conclusions and scope

The results obtained from the simulation of the bond graphs of the situations that
have been modeled are in excellent agreement with what is actually observed in such
situations. We have only dealt with markets where there is perfect competition.
Although monopoly can be taken care of within the framework of the modeling
techniques developed. Modeling of other kinds of markets (oligopoly, monopolistic
competition, etc.) is still to be considered.

One of the things which can be realized with the present set of modeling techniques
is the concept of quality resolvable markets. The markets we have considered are
strictly single product markets, i.e., if the quality of that product changes it becomes
a different good. A very important thing has come up nowadays and that is of
companies adjusting the qualities of the goods manufactured by them after getting
feedback from the consumers. This can be achieved by altering the fractions of the
various qualities that make up the ultimate product. For example consider a soap
manufacturer. He adjusts the various qualities that make up the soap viz. the amount
of TFM, amount of perfume, medicinal additives, packaging, etc. depending on
customer response. Thus, a particular market has to be resolved into the markets of
the various qualities that make it. The individual quality markets are linked to the
main market through transformers whose transformation ratios, nis , are
modulated by the feedback from the market. This modulation can be done by
Intelligent Supervisory Control [6]. Fig. 16.35 depicts such a possible market.

Fig. 16.35.
 EXAMPLES OF THERMOPNEUMATIC, POWER HYDRAULIC SYSTEMS…. 556
Another crucial area of economic systems where bond graphs can be thought to be
used for modeling is the stock market. Stock markets are very chaotic in nature. So,
depending on previous time data, the system can be modeled and can be used to
generate future data. In this process of modeling, the soft computing techniques can
also be thought about.

The imperfect competition in the economic systems can also serve as the potential area
to be modeled using the bond graphs.

Thus, it remains a great challenge to use bond graph techniques for the modeling of
macroeconomic systems whose in-depth analyses are always essential for the
development of any country.

References

1. Brewer, J.W., “Structure and cause and effect relations in social system
simulations,” IEEE Trans. Systems Man. Cybernatics, pp., 468-474, June
1977.

2. Brewer, J.W., “Progress in the Bond Graph Representations of Economics

and Population Dynamics”, Journal of the Franklin Institute.,Vol. 328, No.
5/6, pp., 675-696, 1991.

3. Brewer, J.W., “Ecological Modeling: Bond Graphs'', Systems and Control

Encyclopedia”, pp., 1326-1329, Pergamom Press, Oxford, 1988.

4. Samuelson, P.A., ``Economics'', 18th ed, McGraw, New York, 1970.

5. Henderson. and Quandt., “Microeconomic Theory”, McGraw-Hill, New

York, 1972.

6. Wang H. and Linkens D., “Intelligent Supervisory Control, A Qualitative

Bond Graph Reasoning Approach”, World Scientific, Singapore, 1996.

7. Sastry, V.V.S.Chandramouli. and Srivastava V., “Art of Making Bond graph

Models of Market Economic Systems”, B. Tech. Project, Mechanical
Engineering Department, Kharagpur, May, 1998.