Acceleration Principle

Acceleration Principle

Acceleration Principle, an economic 'law' which states that changes in the demand for finished goods produce larger changes in the demand for the capital equipment used to make them. The reason is that the demand for capital is determined by (a) the replacement of the parts (if any) used up in production and (b) extensions to increase output (if demanded). Suppose a television factory uses capital valued at £50,000 to produce (in a year) receivers valued at 10,000, and that 10 per cent of the capital, or £5,000, is worn out in the process. If demand remains unchanged. £5,000 worth of capital has to be replaced each year. If the demand for receivers increases by 10 per cent to 20 per cent, the demand for capital is (a) 5,000 for replacement, plus (b) £5,000 new capital to produce the 1,000 of additional output, total £10,000. Thus an increase of 10 per cent in the demand for the finished consumer goods 'accelerates' to 100 per cent the demand for the capital to produce it.

The relation between the changes in the two demands is based on the durability of the capital equipment. The larger the proportion that needs to be replaced, the larger the acceleration, and vice versa. The key to the principle is that, since capital is durable, the change in the demand is concentrated on the small proportion renewed each period. This 'durability' is economic, not merely technical. Although only 10 per cent of equipment may wear out each year, it may be necessary to replace 20 or 30 per cent if an invention has made some of it obsolete.

The acceleration principle helps to explain why the demand for capital fluctuates more widely than the demand for final commodities. It operates markedly only in certain conditions: first, when durable equipment is important relatively to materials and labour; secondly, when stocks of finished goods cannot be varied easily (otherwise the increased demand can be met out of the cushion of stocks); thirdly, when there is little or no unused capital equipment; fourthly, when the existing equipment cannot be used more intensively, e.g. by using labor in shifts to work round the dock; fifthly, when the increase in demand is expected to continue, otherwise producers will not expand their productive capacity; sixthly, when there is a general increase in demand (due to an increase in the amount of money in circulation, or to an increase in its velocity of circulation) and not merely a switch of demand from some products to others (in which case the degree of acceleration would depend largely on the importance of durable equipment in the production of the goods for which demand had changed).

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