The accelerator principle is also known as accelerator effect or acceleration principle. It can be described as an economic concept that defines the association between output and capital investment. It is primarily an idea or theory, which stipulates that the cumulative net investment by an individual firm in a particular industry relies on the companies’ potentials in regards to the changes in different outputs including sales, profit, and cash flow among others. The idea also suggests that such a relationship affects the magnitude of variations in the company’s’ demands on their suppliers.
The acceleration principle also suggests that whenever there is an increase in consumer goods, the percentage change in demand for machines as well as other necessary investments essential for making such good will also augment more. This is to say that increase in income led to corresponding but expanded change in investment.
How accelerator principle comes about
Several economic researchers have found out and documented that accelerator effect operates within the industry. However, it should be noted that the actual extent of how this particular effect works vary from one industry to the other. Nonetheless, the investment practices of the firms are influenced by some of their expectations that they have put across as their prospects. But it should also be understood that the expectations of such companies are often determined by the changes that affect economic growth.
Many companies, therefore tend to adjust the inventories as a strategy for responding to the anticipated changes that arise in the consumer demand. It thus means that a company will make positive adjustments when the expected change in demand seems to be a positive and negative adjustment when the anticipated change in demand is negative.
The changes or adjustments in the inventory of the company affect the suppliers as well as accelerating or hinder the growth of the industry depending on the kind of change. You should also note that the corresponding change also stimulates or decelerates broader economic growth depending on how it changes.
Various decisions regarding increasing or decreasing inventory levels and building factories as well as purchasing factory equipment are dependent on several elements including, expected sales; profit generated and business confidence. The need for accurately estimating the expected changes in outputs is imperative for a company. It is also essential for businesses to establish ways of sensitizing how associated changes planned for the firm may have an effect on the economy.
Here is a video by Marketing91 on the Accelerator principle.
How accelerator effect helps in describing the economic cycle
- This principle is used in describing business cycles. It is essential to know that most firms thrive in understanding these cycles because they make it possible for them to determine the right investments to be done at a particular time and hence establish and manage the expectations of
- The accelerator effect also explains that the amount of total investment has to be determined by the rate of change that is reflected in the national income. This is also another significant aspect because it enables the firm to come up with policies of ensuring that the total investments are not adversely affected by the changes in the GDP.
- If the GDP is growing, then it implies that there will be an increase in the growth of net investment. On the same note, it also means that whenever the growth rate of GDP reduces then a decline in the net investment shall also be experienced.
- An interaction between multiplier and accelerator may lead to relatively large variations in the trade cycles. This may stimulate or hinder the broader economic growth depending on the outcome.
It only means that it is important for the companies to be vigilant and understand how their proposed changes and those proposed for the industry affect the broader economic growth or decline depending on the ability of such changes to accelerate or decelerate the economic prospects respectively.