The Accelerator (or Acceleration Principle)

The Accelerator (or Acceleration Principle) is based on the observation that an increase in the demand for final goods results in a more than proportionate increase in the demand for capital goods. In the following example it is necessary for the firm to replace one machine a year as machines sequentially come to the end of their working lives. In this scenario when the firm experiences a 10% increase in the demand for tables during year 3 there is a resultant 100% increase in the demand for table-making machinery (i.e. from 1 to 2) in that year

demand table

While this principle is usually explained in terms of an increase in demand as explained in the above table, it can also work in a downward direction when falling demand for consumer goods leads to a greater percentage reduction in demand in capital goods industries. For this reason changes in the level of demand in capital goods industries can be more volatile than demand swings in industries supplying consumer goods.



Share through

Leave a Reply

Your email address will not be published.