Accelerator principle
(also called the accelerator effect, acceleration principle, or acceleration effect)
DESCRIPTION
The idea or theory that aggregate net investment by firms in an industry is dependent on firms’ expectations about changes in outputs such as sales, profits, and/or cash flow, and where such a relationship has the effect of amplifying further the magnitude of changes in firms’ demands on suppliers.
KEY INSIGHTS
Research on the accelerator principle finds that the principle or effect can and does operate within industries. While the actual extent of the acceleration effect certainly varies among industries, the principle nevertheless suggests that firms’ investment practices are influenced at least to some extent by their expectations of their future prospects, where such expectations are shaped by changes in the growth of the economy, for example, and where such investment practices has the potential to accelerate (or decelerate) further industry (and broader economic) growth. Thus, firms will tend to adjust inventories in response to expected changes in consumer demand, for example, where such inventory adjustments are positive when the expected change in demand is positive and negative when the expected change in demand is negative. Such changes to firm inventories and other investments will not only have corresponding influences on suppliers but also further stimulate (or impede) industry growth and also potentially accelerate (or decelerate) broader economic growth or decline.
KEY WORDS Firm investment, economic growth, forecasting
IMPLICATIONS
Decisions to increase/decrease inventory levels, build factories, and invest in plant and equipment, for example, will be influenced by profit and sales expectations and business confidence. Firms must therefore not only strive to accurately forecast expected changes in their outputs (e.g. sales) but also be sensitized to how associated changes to planned investments by the firm or other firms in the industry may potentially accelerate (or decelerate) favorable or unfavorable economic prospects for the industry and the broader economy.
APPLICATION AREAS AND FURTHER READINGS
Marketing Modeling
Fousekis, Panos, and Stefanou, Spiro E. (1996). ‘Capacity Utilization under Dynamic Profit Maximization,’ Empirical Economics, 21(3), September, 335–359.
Mergers and Acquisitions
Weston, J. Fred (2001). ‘Mergers and Acquisitions as Adjustment Processes,’ Journal of Industry, Competition, and Trade, 1(4), December, 395–410.
BIBLIOGRAPHY
Kuehn, Alfred A., and Day, Ralph L. (1963). ‘The Acceleration Effect in Forecasting Industrial Shipments,’ Journal of Marketing, 27(1), January, 25–28.