In economics, Overshooting refers to a situation in which the market price of a product or asset exceeds its long-run equilibrium price. This can occur due to a variety of factors, including changes in supply and demand, shifts in market expectations, or changes in the economic environment.Overshooting can occur in both upwards and downwards directions. If the market price of an asset exceeds its equilibrium price due to an increase in demand, it is known as an upward overshoot. If the market price falls below its equilibrium price due to a decrease in demand, it is known as a downward overshoot.Overshooting can have significant implications for the economy, as it can lead to misallocation of resources and inefficient market outcomes.For example, if the market price of a particular asset exceeds its equilibrium price due to an upward overshoot, it may encourage producers to increase production, even though the demand for the asset is not sustainable in the long run. This can lead to a surplus of the asset on the market and a subsequent downward adjustment in the price.There are several theories that attempt to explain the causes and consequences of overshooting in the market. One such theory is the adaptive expectations theory, which suggests that people's expectations about future prices are influenced by their past experiences. According to this theory, if the market price of an asset has been consistently increasing in the past, people may expect the trend to continue and may be willing to pay higher prices for the asset. This can lead to an upward overshoot in the market price.Another theory is the rational expectations theory, which suggests that people's expectations about future prices are based on their knowledge of the underlying economic fundamentals. According to this theory, if the market price of an asset exceeds its equilibrium price, people may expect the price to eventually return to its equilibrium level, and may be willing to hold onto the asset or even buy more of it in anticipation of a future price increase. This can lead to a persistent overshoot in the market price.It's important to note that overshooting can be difficult to predict and can have significant consequences for the economy. As a result, policymakers and market participants need to be aware of the potential for overshooting and be prepared to take appropriate action to address it.
