Overproduction - Term Overview


Overproduction is a situation where the market supply exceeds the demand. That is, the stock for sale is greater than the amount that consumers are willing to buy. All this, at a certain price.

In simple terms, in an overproduction scenario, the amount that consumers require is less than that offered by sellers.

The term overproduction can be used as a synonym for excess supply. However, we can understand that the second is a consequence of the first. In other words, an overproduction generates an excess supply.

Likewise, even if there is already an excess supply in a market, overproduction may continue to occur, which, according to the law of supply and demand, would push the price down.

Overproduction characteristics

The main characteristics of overproduction are the following:

- The economy doesn't reach the point of greatest efficiency, which would be when producers can sell all their merchandise.
- It's the opposite of excess demand.
- Buyers and sellers don't achieve the highest possible profit.
- In perfect competition there is no overproduction because the market reaches equilibrium on its own. That is, if the quantity supplied is greater than the public demand, producers will lower prices in order to place their entire stock.
- One of the causes of overproduction is that the Government fixes by law what will be the price (fixed or minimum) of a product and this rate, in turn, is higher than the market equilibrium.
- Overproduction can be caused by a random event. For example, if a natural phenomenon causes a roadblock and prevents Juan's harvest from reaching its destination market. The farmers will then be left with a surplus that they will have to sell at a very low price.
- Losses are recorded in consumer and producer surplus.

Overproduction example

An example of overproduction can be the one indicated that China had steel in 2016. This, because a production of more than 822 million tons was expected that year, but the demand would reach only 672 million tons, according to reported the BBC news network.

This would imply a downward trend in the prices of steel and of the products that use it as an input, such as construction materials and cars. However, the rate for these goods also depends on other factors.

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