Overproduction is a situation characterized by an excess of a given product or service on the market. It is rare for a market as a whole to experience overproduction, but imbalances in the market can result in temporary surpluses in various sectors that must be corrected. It is the flip side of underconsumption, where there is not enough demand to meet an existing supply of goods and services. These two concepts are closely related and sometimes treated interchangeably.
A number of situations can lead to overproduction. These can include literal overproduction, in the sense of a company increasing its output without checking to see if there are customers ready to snap up the excess supply. Reduction in consumption can play a role, as can inequal distribution. A company may find that it has a surplus in one area and a shortage in another as a result of failing to distribute products in a logical way.
There are several consequences to overproduction. One is that prices tend to drop. When faced with an excess supply, consumers are well aware that they may be able to force a company or store's hand to get a better price. Over time, prices overall will fall as stores attempt to move inventory. These falling prices may create a situation in which a company has difficulty breaking even for a given service or product. The falling prices can eventually create a correction, by creating a disincentive to produce more, which leads to a shortage and an increase in price.
Another problem that can emerge is unsold inventory. Stores and warehouses generally want to act as waystations for inventory. For every day that a product sits, the company needs to pay to store and manage it. Moving products through inventory creates high turnover that allows companies to make more money. Having excess inventory can force stores to return items or slash prices to try and move them out the door, two costly solutions to the overproduction problem.
Economic theories about the causes of overproduction vary. There are also disputes about the best way to correct it. Fluctuations in supply and demand are an ongoing issue in many active economies and they are affected by numerous factors. Companies that can identify and predict market changes stand to experience the best performance because they can fluctuate to meet the needs of the market. Companies that cannot do this can find themselves struggling to catch up.
