The Accelerator effect is usually stated in the field of economics. This is a positive effect that is shown on any private investment in terms of its growth in the market economy. The increasing gross domestic product that may also be called an economic boom signifies that business in general terms undergoes the rising profit margins, increased amount of sales and increased internal cash flow, and thus greater use of existing capacity. This usually gives a sense that the profit expectations of the business and the business confidence also rises.
Every firm has some strategies to work which usually make the progress towards achieving an optimum capital stock and not only moving smoothly from one type and size of plant and machinery to the other. This means that every firm aims to increase its profit to an optimum level rather than just moving and improving its machinery and buildings. The accelerator theory concept was mainly given by Thomas Nixon Carver and Albert Aftalion before Keynesian economics came into force but it came into public knowledge more and more as the Keynesian theory began to dominate the field of economics. Some people criticized it and also argued against the accelerator theory because it was thought to remove all the possibility of the demand control through the price control mechanism. Some empirical researchers also supported the accelerator theory.
The analysis based on the Accelerator effect encourages businesses to build up more factories, equipment, and other buildings and also to install more machinery to expand their sales and make up a good profit. The expenditure on such things such as buildings and machinery is called a fixed investment. This may further lead to a grand growth of the economy through the increase of customer income rate and also from the purchases that are just a case in the multiplier effect.
The accelerator effect is not only in case of the positive growth of a business but it can also be in the negative direction as well. This effect will then go towards a falling rate in Gross Domestic Productivity (GDP). When a company faces this kind of accelerator effect then it hurts the business profits, crashes the sales, reduced cash flow, lesser use of the capacity and expectations. This will in turn discourage the fixed investment and will worsen the situation by the multiplier effect.
ECONOMIC BEHAVIOR RELEVANCE
The accelerator effect explains the economic behavior in the best when either the economy is moving in a negative direction, that is, away from full employment or in the case when the economy is already below that level of production. This is because the aggregate demand is high and it competes against the limits that are set up by the existing labor, the existing stock availability of the capital goods, the availability of necessary natural resources, and also the technical ability of an economy to convert all sorts of inputs into the desired products. As we know about the acceleration effect that it depicts that the increase of all-round income accelerates capital accumulation, and also shows that the decrease of income accelerates capital depletion. This often causes the system to become more unstable or cyclical.
If we consider an industry where the demands are increasing rapidly, then the firms will respond to this growing demand by expanding their present rate of production and making more efficient use of their existing production capacity. They may also use their stocks of finished products in order to meet this higher demand for production.
FUTURE PREDICTION MODELLING
If at any point in time, the company or the firm feels that this higher level of demand will be sustained as such in the near future then they also have another option. A firm may then choose to increase its spending on capital goods which includes buildings, plants, machinery, factories, and new technology in order to increase its production capacity. Sometimes there are also cases in which we see that the investment of a firm in capital goods goes far beyond what is actually needed to just replace the old worn-out goods and fully depreciated machinery. In such cases, the capital stock of the business will be said to become larger than before.
In sense, we can also that the capital good demands directly vary with the demand for products in a firm. This means that the demand for capital goods is directly being affected by the demand for the products that a firm is supplying to the market. Hence, this gives rise to the accelerator effect. The principle of the acceleration effect states that for a given change in the demand of the consumer goods, there will be a greater change in percentage in demand of the capital goods.
The Accelerator effect despite being very clear has drawn some criticism to it as well. The criticism often refers that the current capital stock of the business cannot be adjusted immediately to match the desired level of demand. This is due to the fact that it takes cost to adjust randomly and change all the factors of production to match the desired level of demand. The next criticism is the factor of time lags. The adjustment costs may include the huge cost of business due to the installation of new equipment or the financial cost incurred over re-training the workers.
This theory is specifically interpreted to establish a whole new economic policy. If we consider the accelerator theory from all aspects, then it might be used to determine that introducing tax cuts could generate more of the disposable income for consumers or not. The consumers would then demand more products and it would be preferable in relation to the tax cuts for businesses. Every government and the Economists made a different interpretation of this theory but the overall intent seems generalized profits as output.