I'm interested in creating a visual programming language which can aid non-programmers(like children) to write simple programs, much like Labview or Simulink allows engineers to connect functional blocks together without the knowledge of how they are internally built. Is this called programming by demonstration? What are example applications? What would be an ideal platform which can allow me to do this(it can be a desktop or a web app)
There is Scratch written by MIT which is much like what you are looking for.
If you want to go ahead with this, the platform that I suggest is the one used to implement Scratch (which already does what you want, IMHO), which is Squeak Smalltalk. The Squeak environment was designed with visual programming explicitly in mind. It's free, and Smalltalk syntax can learned in half an hour. Learning the gigantic class library may take just a little longer.
The adventure on which you are about to embark is the design and implementation of a visual programming language. I don't know of any good textbooks in this area, but there are an IEEE conference and refereed journal devoted to this field. Margaret Burnett of Oregon State University, who is a highly regarded authority, has assembled a bibliography on visual programming languages; I suggest you start there.
You might consider writing to Professor Burnett for advice. If you do, I hope you will report the results back here.