Category: 

In Economics, what is Overproduction?

Article Details
  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 24 September 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Built at the request of Dag Hammarskjöld, the United Nations Headquarters has a meditation room dedicated to silence.   more...

October 1 ,  1890 :  Yosemite National Park was established.  more...

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.

Ad

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.

Ad

You might also Like

Recommended

Discuss this Article

horsebite
Post 8

@indigomoth - Strictly speaking, corn isn't being overproduced because there is someone to buy what is grown. It's not like there is a big surplus of unsold corn every year. Quite the contrary, actually.

Now, if you want to argue that it's being marketed and sold for a bunch of purposes that are harmful and unnecessary, I'm with you on that. Subsidized ethanol and high-fructose corn syrups are huge wastes of money and not helpful to anyone, in my opinion.

BigManCar
Post 7

@Misscoco - I remember the Cabbage Patch debacle, with moms fighting over them in the stores and huge long lines. That was before eBay, too. Good thing, otherwise they all would have been $500.

Every year there seems to be a hot Christmas toy, and certain people try to figure out which one it will be and then hoard them. Some of them get stuck with the stuff, and I can't say I feel to sorry for them.

bigjim
Post 6

I remember when the Playstation 3 came out, people were buying them up and trying to sell them for really inflated prices that Christmas, and there ended up being a glut of them because they didn't sell as well as had been predicted. A guy I was working with at the time got stuck with five or six of them, nearly broke him until he could get them sold at a small loss.

The domestic car companies used to do that too, but they don't do it as much anymore. Because of their labor agreements, they had to keep certain plants open no matter what, so they would just keep making cars even if there weren't buyers. You could go to various storage lots around Detroit and see hundreds or thousands of new cars sitting there, with the lot getting more full over time. Eventually, this can be a killer, and you saw what happened in 2009.

Misscoco
Post 5

I remember when my daughter was about seven or eight, she wanted a Cabbage Patch Doll in the worst way. We went to several stores and couldn't find a Cabbage Patch Doll anywhere. My daughter was heartbroken. For some reason the manufacturer underestimated the popularity of the doll, and they were in a state of underproduction of this item.

I heard, through the grapevine, that Toys R Us was taking orders and it would take about three months to get one in. So we ordered one and began the long wait. After a couple of months, my daughter started pleading with me to call and see if the doll had arrived.

This went on for 2 more months and finally the big day came - the store called and said her doll was in. We were down to Toys R Us in a flash to pick up the beloved doll. What an ordeal!

BoniJ
Post 4

Overproduction of a single product line, like a toy that has caught on with kids, can lead to big losses. At first the company cannot keep up with the demand - every kid wants to have one. They put more into production without thinking that they are serving a fairly small niche of consumers.

As time goes by the inventory is continually being replaced and the cost stays high. Eventually the market is saturated and one products per kid is usually all that is sold.

Then the inventory goes up because the company didn't slow down production in time. Here are all these toys that nobody wants, so prices are knocked down and special coupons offered. At this point, a lot of money is lost. This company needs to do more market research to predict needs.

KoiwiGal
Post 3

@indigomoth - I think what they should do is start converting some of the corn growing land into land that grows bio-fuels. At the moment they don't have enough land to grow enough food and enough biofuels at the same time.

But, so many industries depend on that corn syrup at the moment. I do wonder what would happen if the government funding and the cheap source of sugar was yanked from under them.

indigomoth
Post 2

@bythewell - That seems like a really good product to have in excess! And if people are still making the wines, it probably hasn't reached the point of true "overproduction" as there is still a good market for the product, even though the price has gone down.

The product that always comes to my mind when I hear "overproduction" is corn in the United States. They originally started growing it because they were expecting a huge population boom that never really happened, but now the government supplements the farmers and they produce more than they should.

So it goes into corn syrup and other products that are currently making the world a fatter place. And causing diseases which the government then has to fix. We lose money all around.

bythewell
Post 1

I was at dinner with a couple of Finnish friends in New Zealand and they commented on the fact that the wines were so much cheaper there than the beer, which they found very strange.

I explained to them that recently New Zealand realized that it had very good wine growing conditions and that there was a lot of money to be made from exports. New Zealand wines tend to do very well in international competitions, and wine is popular in the country as well.

So, in consequence New Zealand has almost an overproduction of wine and it has driven the price right down. Even with quite heavy taxes, you can still get a good bottle for around $10.

While hops, which are needed to make beer, are still quite difficult to find in the country, making beer more expensive to make, and therefore, to buy.

Post your comments

exception 'Exception' with message 'error writing captcha: Duplicate entry '2147483647' for key 'PRIMARY'' in /ssd/www/wisegeek/public_html/_core/classes/public/Captcha.php:44
Stack trace:
#0 /ssd/www/wisegeek/public_html/_core/controls/public/ControlDiscussionPostBox.php(324): Captcha->createCaptcha()
#1 /ssd/www/wisegeek/public_html/framework/classes/Control.php(104): ControlDiscussionPostBox->preRender(false)
#2 /ssd/www/wisegeek/public_html/framework/classes/Control.php(149): Control->render()
#3 /ssd/www/wisegeek/public_html/tpl/default-nocustom-lu/pages/public/article/article.htm(526): Control->__toString()
#4 /ssd/www/wisegeek/public_html/framework/classes/Control.php(300): require('/ssd/www/wisege...')
#5 /ssd/www/wisegeek/public_html/framework/classes/Control.php(309): Control->requireTpl('pages/public/ar...', Object(PageArticleCom), true)
#6 /ssd/www/wisegeek/public_html/framework/classes/Control.php(131): Control->renderTpl('pages/public/ar...', Object(PageArticleCom))
#7 /ssd/www/wisegeek/public_html/framework/classes/FormDataControl.php(87): Control->renderTemplate()
#8 /ssd/www/wisegeek/public_html/framework/classes/Control.php(109): FormDataControl->renderTemplate()
#9 /ssd/www/wisegeek/public_html/framework/classes/ScriptPage.php(50): Control->render(false)
#10 /ssd/www/wisegeek/public_html/framework/classes/Control.php(149): ScriptPage->render()
#11 /ssd/www/wisegeek/public_html/framework/classes/Page.php(97): Control->__toString()
#12 /ssd/www/wisegeek/public_html/_core/classes/public/PublicFrontController.php(443): Page->processRequest()
#13 /ssd/www/wisegeek/public_html/_core/classes/public/PublicFrontController.php(7): PublicFrontController->renderPage()
#14 /ssd/www/wisegeek/public_html/index.php(11): PublicFrontController::run()
#15 {main}