A system and method for demonstrating or testing operation of on-board diagnostics in a vehicle include imitating performance degradation of a vehicle hardware component and/or associated vehicle system by dynamically modifying at least one control system parameter value associated with the hardware component in response to a request to demonstrate operation of a selected diagnostic function or a specified performance degradation. Embodiments modify at least one control system parameter value associated with the input/output signal of a sensor/actuator to imitate a specified performance degradation. The diagnostics independently monitor operation of various vehicle control systems and operate to detect the degraded performance without knowledge of, or distinguishing between, whether the performance degradation was caused by an actual hardware component, or by the requested modification to the control system parameter value(s) associated with a particular hardware component.