Topic 12: Modelling Flashcards
What is simulation modelling?
Simulation modelling means using a computer and mathematical formulas to imitate a real-life phenomenon.
How does an analyst use a simulation model?
An analyst builds a model in order to try out ‘what if?’ scenarios. The model predicts what could happen in the future when the analyst changes inputs to the model.
Give some examples of simulation modelling.
Financial modelling - ‘what if’ we offer discounts on popular food items? How will our profits be affected? (supermarket).
Government monetary policy modelling - ‘what if’ we put up taxes? How will the Treasury’s income be affected?
Weather modelling - what is the short term and long term forecast?
Climate change - ‘what if’ the global temperature rises by 2 degrees? How will that change weather forecasts?
Building stresses and strains - ‘what if’ we build an office block with 100 floors? How will it cope with strong winds?
Transport modelling - ‘what if’ we build a cycle lane in Eastbourne? How will it affect traffic congestion?
Give two advantages of simulation modelling in financial forecasting for a company.
It is possible to analyse many different future situations that couldn’t be tested in real-life.
The company avoids wasting money on actions that would not work out.
It can ‘roll on’ the model to see what it is like after more than one year.
It can prepare to cope with periods of low profits or rapid growth.
Give two disadvantages of simulation modelling.
It is difficult to know if all the necessary equations have been included.
Complex simulations, such as weather forecasts, require significant processing power.
If something unusual happens in real life, the model won’t be able to predict the outcome.
Long-term predictions are difficult to make accurately.
