Hi friends, in today’s article we are going to know about Accelerator Principle (Limitation of Accelerator Principle). So let’s discuss in details.
What is Acceleration Principle?
Concept of accelerator in economics – The accelerator principle explains the process by which an increase or decrease in the demand for consumption goods leads to an increase or decrease in investment on capital goods.
It can be defined as the ratio between net induced investment and an initial change in the consumption expenditure. Symbolically,
V = ΔI/ΔC or ΔI = VΔC [Accelerator Principle Formula].
V = Accelerator principle,
ΔI = Change in Investment,
ΔC = Change in Consumption expenditure.
Different between Multiplier and accelerator principle
(i) Multiplier shows the effects of changes in investment on consumption, income and employment. But acceleration theory shows the effect of consumption and income on investment.
(ii) The multiplier operates both forward and backward direction but accelerator principle works only in forward direction.
(iii) The value of multiplier depends upon the marginal propensity to consume (MPC), but the value of accelerator depends upon tools, machinery, capital goods, etc.
Limitation of Accelerator Principle
The acceleration theory of principle is criticized on the following ground –
• The acceleration theory based on a constant output ratio, but this ratio does not remain constant in the modern dynamic world.
• The accelerator theory assumes that there is no unused capacity in plants. But if some machines are not working to their full capacity and are tying idle then an increase in the demand for consumer goods will not lead to the increased demand for new capital goods. In such a situation this principle will not work.
• In this theory, an over simplifying assumption is taken that time lags are not present between demand and output and between the supply of factor inputs and outputs.
• The accelerator principle neglected the role of technological factors in investment.
• The acceleration principle theory neglects the role of expectations in decision making on the part of entrepreneurs. The investment decisions are not influenced by demand along, they are also affected by future expectations like stock market changes, political developments, economic climate, etc.
So friends, this was the concept of Accelerator Principle (Limitation of Accelerator Principle). Hope you get the full details about it and hope you like this article.
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