What Is the Acceleration Principle?
The acceleration principle is an economic concept that draws a connection between changing consumption patterns and capital investment. It states that if appetite for consumer goods increases, demand for equipment and other investments necessary to make these goods will grow even more. In other words, if a population's income increases and its residents, as a result, begin to consume more, there will be a corresponding but magnified change in investment.
The acceleration principle is also referred to as the accelerator principle or the accelerator effect.
Understanding the Acceleration Principle
Companies frequently seek to gauge how much demand there is for their products or services. If they notice that economic conditions are improving and consumption is growing at a sustainable rate, they will likely invest to increase their output, particularly if they are already running close to full capacity. Failure to do so could see them miss out on a chunk of potential future revenues and lose ground to faster-responding competitors.
According to the acceleration principle, capital investment increases at a faster rate than demand for a product. That is because investments to boost output often require significant outlays.
Economies of scale determine that investments are generally more efficient and come with greater cost advantages when they are significant. In other words, it makes more sense financially to increase capacity substantially, rather than just by a little bit.
The acceleration principle does not compute the rate of change in capital investment as a product of the overall level of consumption, but as a product of the rate of change in the level of consumption.
The acceleration principle has the effect of exaggerating booms and recessions in the economy. This makes sense, as companies want to optimize their profits when they have a successful product, investing in more factories and capital investments to produce more.
Several economists, including Irving Fisher, note that economic cycles move in tandem with company attempts to match ever-changing consumer demand. When the economy is growing, customers are buying and low interest rates make it cheaper to borrow, management teams regularly seek to capitalize by ramping up production.
Eventually, this inevitably leads to there being too many products and services in the market. When supply outstrips demand prices fall, prompting companies, faced with plummeting sales and profits, to scramble to keep their costs under control. Often, they respond by slashing capital expenditure (CapEx) and laying off staff.