The term simulation is used in different ways by different people. As used here, simulation is defined as the process of creating a model (i.e., an abstract representation or facsimile) of an existing or proposed system (e.g., a project, a business, a mine, a watershed, a forest, the organs in your body) in order to identify and understand those factors which control the system and/or to predict (forecast) the future behavior of the system. Almost any system which can be quantitatively described using equations and/or rules can be simulated.
The Purpose of Simulation
The underlying purpose of simulation is to shed light on the underlying mechanisms that control the behavior of a system. More practically, simulation can be used to predict (forecast) the future behavior of a system, and determine what you can do to influence that future behavior. That is, simulation can be used to predict the way in which the system will evolve and respond to its surroundings, so that you can identify any necessary changes that will help make the system perform the way that you want it to.
For example, a fisheries biologist could dynamically simulate the salmon population in a river in order to predict changes to the population, and quantitatively understand the impacts on the salmon of possible actions (e.g., fishing, loss of habitat) to ensure that they do not go extinct at some point in the future.
The Power of Simulation
Simulation is a powerful and important tool because it provides a way in which alternative designs, plans and/or policies can be evaluated without having to experiment on a real system, which may be prohibitively costly, time-consuming, or simply impractical to do. That is, it allows you to ask "What if?" questions about a system without having to experiment on the actual system itself (and hence incur the costs of field tests, prototypes, etc.).