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Accelerator Theory Definition
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.
A Little More on What is 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.
Reference for “Accelerator Theory”
Academics research on “Accelerator Theory”
Accelerator, theory of the firm and the business cycle, Tsiang, S. C. (1951). The Quarterly Journal of Economics, 65(3), 325-341. I. Accelerator: an external framework or an internal variable, 325.- II. The variations of the assumption of an unchanging accelerator concerning the theory of the firm, 327.- III The inelastic supply of fund to respective firms verifies the modus operandi of the acceleration principle and makes the investment rate a function of the income level instead of the rate of variation in income during the upswing, 331- Accelerator and timeline of investment, 335.- V. Importance of time dimension of investment in explaining the presence of excess capacity and downturn, 339.
Financial Accelerator Theory and the Russian Mortgage Market, Stolbov, M. (2012). Journal of the New Economic Association, 13(1), 79-98. The paper analyses the crisis effect on the Russian mortgage market from the standpoint of the financial accelerator principle. It is established that before the crisis, the level of monetary equilibrium of banks and lenders determines beforehand their result during the most acute period of the extreme confusion. Payment-income rate and loan-to-value possess a non-linear relationship with the refinancing volumes of a mortgage loan in the secondary market. With total regard to the “flight to quality’ effect relating to the financial accelerator system, the Biggest Russian banks and jurisdictions controlled by non-residents outperforms others during the crisis.