Acceleration Principle

Definition: The acceleration principle explains how changes in consumption can affect economic growth and the ability of entrepreneurs to respond quickly to shifts in consumer preferences by raising the price of their goods or lowering the quality of their service.

What Is the Acceleration Principle?

The acceleration principle usually arises from a sudden change in demand (demand curve becomes upside down) for something that would not have been bought then if the demand curve hadn’t changed.

The acceleration principle is important because it provides a simple and accurate way of labeling cycles of economic activity: growth or decay. Product demand can start as a growth demand (this is what economists call a “demand shock”) but become a decay-level demand just before or shortly after saturation.

The acceleration principle is that the speed of change in an economy can be increased by focusing on new opportunities at the beginning of each phase. According to this principle, a new business will tend to cause other businesses to begin overgrowing too. This growth will cause the prices of all goods and services in general to fall, leading to even more consumption and growth.

Understanding the Acceleration Principle

In the modern economy, companies must measure not just revenue but profit as well. The difference between revenues and expenses in a period during which rates are low is known as Profit. Acceleration principle explains why most companies launch new products more quickly than change what they’re doing. After all, if customers buy more often, the firm can charge more per unit sold—and make more money.

Companies often launch products at exponential rates. This is called the “Acceleration Principle”: the more a product or service becomes available, the more valuable it becomes to customers. On balance, good product innovation leads to growth; bad product innovation leads to the continued loss. Accelerating product development can be either conscious (planned by management) or sub-conscious (accumulated by the individuals in an organization who are unaware of the called-for acceleration). However, most companies do both consciously and unconsciously run their product marketing on the Acceleration Principle.

The acceleration principle can be applied to almost any industry. For example, if you are a small business owner, it may help you strike the right balance between expansion and efficiency. Many businesses build up their capacity slowly but surely, waiting for demand to rise before they expand. The problem with this approach is that when the economy recovers, those sitting on the low-spending ground suddenly find themselves with more customers than they can serve. This is when the acceleration principle becomes an important part of economic decision-making.

How the Acceleration Principle Works?

The Acceleration Principle (AP) states that it takes an increase in consumer demand–a rise in demand–for businesses to fully utilize their capacities. Businesses can capitalize on rising prices by raising prices; the higher prices attract more customers and lead to further growth. Or they can use economies of scale to reduce costs and compete more effectively on price; as production capacity grows, prices fall.

The Acceleration principle is a theoretical model of economic growth which holds that economic activity, use and satisfaction of goods in a market, and environmental factors can all influence overall economic growth and development. It is used to evaluate actions that generate economic growth. The acceleration principle can be part of a sustainable model of growth as it makes possible the creation and use of a wide range of goods in a given period. Growth depends on people’s choices and lifestyle and explores how these affect technological innovation, investment, human capital, geographic mobility, technology, populations.

Acceleration Principle Example

The Acceleration Principle is a simple explanation of the way in which the banking industry works. The Banking industry works straightforward. They loan money to people at very low interest rates and then get those customers to pay them back over a long period of time. They do this by setting up a debt for the customer which they can then repossess at any time for the full amount owed.

The Effects of The Acceleration Principle on The Economy

The acceleration principle is essentially a law of economic physics that states that economic growth and development tend to outpace the ability of economic actors to monitor and adjust for their incentive structures and incentives when an economy is growing rapidly, any effort to rein in excess growth risks causing a recession.

The Acceleration Principle states that economies tend to grow faster during periods of expansion and slower during periods of contraction. In a general sense, faster growth implies faster technological progress and economic growth as a whole.

In a recession, companies tend to cut back on workers and services to maintain efficiency and effectiveness in meeting sales targets. But when the economy grows rapidly, capitalistic incentives kick in, and firms invest heavily in new product development and hiring new workers even in recession conditions.

Multiplier and Accelerator

Multiplier and accelerator are two similar explanations of economic law. But they are not synonymous. Multiplier measures the change associated with an increase in income or output. Accelerator measures the change associated with an increase in output – such as hiring a new worker or improving an existing one.

The two approaches complement each other, but their emphasis differs: While accelerator emphasizes accelerating change through more effective use of resources, multiplier emphasizes accelerating change through more effective use of existing resources.

Conclusion

The acceleration principle is a business principle that states that companies should adjust their investment plan in response to new information, market conditions, and competitors. The basic premise of the acceleration principle is that a startup should not undertake costly projects with high risks until there is strong evidence that the investment will generate positive cash flow.

An important feature of the acceleration principle is that businesses must be careful not to commit to large amounts of fixed costs before knowing if demand will continue as expected. Others have argued that fixed costs can be very costly and may cause delays in launching or growth.