What is the Accelerator Theory?

In economics, accelerator theory is a theory that draws attention to the relationship between the increase in investments, income, and demand. It maintains that investments in a company increase when demand increases for the company's product/service or income increases for any reason (such as from increased sales or higher prices). The accelerator theory also maintains that when there is an increase in demand, companies increase their production level to increase earnings or increase price to maintain demand but earn more revenue. A company that experiences an increase in demand will grow faster than other companies that do not see the same increase in demand. This is because in order to meet demand, the company would either increase the price of goods or increase investments or production. If the company has an indication of a long-term, sustained positive level of demand, the company will invest more in production processes and increase its production capacity to meet this level of demand.

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How to Apply the Accelerator Theory

A company that applies the accelerated theory will in turn experience accelerated growth. The accelerator theory was developed by Thomas Nixon Carver and Albert Aftalion, and some others. It was regarded as new economic policy at that time. The accelerator theory was further developed by Keynesian economists. This theory however gained prominence in economics when the Keynesian theory emerged in the 20th century. There are, however, some arguments against the accelerator theory. The most intense one was that the theory disregarded the tendency for demand control through price control.

Related Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking

• Structure Conduct Performance Model
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory