The accelerator model is based on an assumption of a stable (or fixed) capital to output ratio. It stresses that planned investment is demand induced. That is, the demand for new plant and machinery comes from the demand for final goods and services.

If expected demand (output) is higher than the present capacity of the firm then additional plant and equipment may be required. Thus investment is a function of the rate of change in national income. A slowdown in the growth of consumer or export demand may actually cause the demand for planned capital investment to fall. Investment spending is usually more volatile than changes in national output as a whole. The accelerator theory offers one explanation for this volatility.

There are some limitations of the accelerator model.

·        Firstly, even if demand does increase, this change may be perceived as transitory and therefore the firm may have no incentive to invest.

·        Secondly, firms may not have to invest if they are operating with spare capacity and can meet an increase in demand by using existing inputs more intensively or with greater efficiency.

·        Thirdly the model assumes that firms are responding to changes in demand when they adjust the size of their capital stock. In reality most firms adjust their planned investment to predicted future levels of demand (they have forward looking expectations).