Simulation seems to be something attempting to copy the real world. A flight simulator or golf simulator attempts to copy the real world flying or playing of golf. People know it is not the actual thing and can play along for what it is or try to break it by crashing the plane knowing nothing real is going to happen.
Playing in a role-playing game also bring in verisimilitude or playing along with things not real. People should know playing the game and swinging a sword to kill an orc is not real. Simulation says that a real sword does more damage than a dagger so the game sword deals more damage than a dagger. My characters strength is really strong, so he deals even more damage. There are boundaries between how far people want to go which we might call gritty meeting boundaries of fun and speed of play. Examples of threads on armor being more/less cool vs a sword and need a flail or something.
Outside of rpg context, a simulation is a test engine for determining outcomes for certain sets of parameters based on observed relations.
In the rpg context, simulation drives certain game mechanics, depending on the game system you are using.
Simulation (to a certain extent) provides the basis for the GM to provide a consistent and reactive world, where consequences of actions or inaction may play out for the player characters to experience.
Sabotage a trading mission, perhaps by delaying it when raiding it doesn't work out, starting a bidding war or bringing in a rival consortium... things like this may start a scenario, a campaign, or a prequel trilogy.
You can simulate an economy or an ecology as the backdrop or even the core activity of your party. BECMI D&D introduced the domain building aspect with at least nods to simulation, while hardcore medieval (or other period) games discuss harvest yields and consequences of supply runs missed, tithes unpaid or herds raided. Even when using large amounts of handwavium, simulation of fictive reality is attempted.
Scarcity is a typical obstacle for characters, requiring missions or plunder to achieve a goal. Already the statement that there is this scarcity is a form of simulation, never mind how well this is thought through.