an economic principle that measures the correlation between investment changes in the goods industry against consumption rate changes.
Acceleration Principle Details
To further simplify the acceleration principle, when the demand for certain goods increases, there will be a much higher demand for raw materials, equipment, inventory, staff, and anything required to up the production level. If a person has short-term goals, they will see that the acceleration principle does not work in their favor as investments require massive outlays, intensive planning, and lengthy preparation.
At this point, economies of scale come to play. To reap substantial returns from their investment, they must aim to put down a massive investment to begin with. This way, they will reap way more in the long run instead of what they will have reaped had they invested little while expecting short-term profits.
Every time a company concludes that its output level is close to full capacity, the next sensible thing is to plan how they will massively invest in increasing the said output. Of course, after they have established that the consumption is sustainable and the economic status is stable or favorable. Since change is inevitable, companies that fail to adjust to the growing demand are likely to be phased out of the market with competing brands that would have jumped on the opportunity.
Example of an Acceleration Principle
Assume that you need 200 production machines to deliver 2,000 consumer goods. Let's say that the machines have a lifespan of 20 years, after which you'll need to replace them. If at all, you want to maintain a constant output of 2,000 goods. Keep in mind that this is highly unlikely as the economy changes drastically over 20 years.
So for more realistic results, let us assume that there will be a 20% increase in consumer demand. This will mean that the company will now be required to produce 2,200 goods to satisfy their customers. This will also require them to increase the number of production machines to 220. In short, a 20% increase in demand results in a 200% increase in the required investment hence explaining the principle of acceleration. Or what can also be known as induced investment.
In this same company, if we assume that the machines have a 10-year life span, a 20% increase in the average demand for their consumer goods will increase by 100% of the initial gross investment. This shows that the greater the machines' life span, the more the accelerator rate and the greater the effect on the business. The lesser the life span of one's machines, the lower the accelerator's value and, hence the less the effects.
Significance of the Acceleration Principle
If a person wants their business to thrive in the long run, then it is highly imperative to employ the acceleration principle (among other principles) in their future investments. Here are a few reasons why:
- It greatly reduces the risk of a business succumbing to booms or recessions. This is if the said company does not fall to the temptation of over-investing when the consumer trend has not been consistent.
- It helps companies plan for future investments preventing them from being caught unawares ten or twenty years down the line.
Multiplier vs. Acceleration Principle
The multiplier and acceleration principles are very similar. The multiplier refers to the effect of investment on both consumption and employment. In contrast, the accelerator principle refers to the effect that change in consumption rates will have on investment.
This means that the multiplier is heavily dependent on the marginal propensity to consume. This is an economic term to depict the increase in consumption and spending when disposable income increases. In short, the multiplier illustrates the fact that if there is an initial injection into the economy (say, a rise in net exports or government spending), then within a period, there will be a greater increase in aggregate demand and real GDP.
So, in short, the multiplier is dependent on physiological factors such as government spending, public investment, net exports, while the accelerator principle leans more towards technological factors such as equipment or technology. Somehow, the accelerator is more of a result of the action that growth has on investment. Its counterpart, the multiplier, is more of a reaction of consumption to increased investment.