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Here's a good background article on overclocking that might help answer some of your questions.
"Overclocking is the process of making a computer or component operate faster than the clock frequency specified by the manufacturer by modifying system parameters. One of the most important techniques is running at a higher clock rate (more clock cycles per second; hence the name "overclocking"), but other parameters, such as CPU multiplier and memory timings, can also be changed and would be considered to be overclocking. Operating voltages may also be changed (increased), which can increase the speed at which operation remains stable. Most overclocking techniques increase power consumption, generating more heat, which must be dispersed if the chip is to remain operational.
The purpose of overclocking is to increase the operating speed of given hardware. The trade-offs are an increase in power consumption and fan noise, the system can become unstable if the equipment is overclocked too much, and the risk of damage due to excessive overvoltage or heat generation. In extreme cases costly and complex cooling (e.g., water-cooling) is required.
Conversely, underclocking trades off slower operation to reduce power consumption and temperature, cooling requirements (and therefore the number and speed of fans, allowing quiet operation) and, where relevant, increase battery life per charge. Some manufacturers underclock components of battery-powered equipment to improve battery life or implement systems that reduce the frequency when operating under battery.
The speed gained by overclocking depends largely upon the application; benchmarks for different purposes are published. In some cases there is a simple speed gain and saving of time; in others a certain speed may be required for correct operation, as in displaying high-resolution video and playing games with fast action. The numerical gain varies, but is often of the order of 20%."