Arbitrage Basics. Created by Sal Khan.
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Loudrockacdc, you're right too if considering the effects over time, that yes, more demand in one market begins, more sellers will enter that market when prices begin to go up. You can also have more sellers enter a market if they see volume of sells go up, they need to find a market that is quickly getting rid of apples at a steady price, no big leaps up or down. New sellers may find that cheaper market better as they have lots of quantity and will maximize their profits by having a stable price and make money off volume of sales... the higher price market means more of their apples don't get sold quick enough and just rot, or more expense finding more markets to deliver and try and sell their apples.
So in this scenario, the key phrase: "all other things being equal"... meaning quantity supply is the same for both markets, and no other new quantity supplied by some new supplier or by the same dealers are available over the period of time in conjecture. That way you get the idea in the short run that markets malfunction. Over time they eventually may correct to a fair price that nobody is making a risk free return, detriment that some people are getting screwed because no extra value benefit is being generated.
In the real world you can have many things happen that may make arbitrage last longer, or shorter. Many reasons why it could last longer, such as suddenly volume kicks up, and guess what that dealer in the cheaper market has a warehouse of more apples: more supply and wow! I'm getting rid of these apples quicker at this price, I'm not changing the price at all, I want these sold, and I'm still maximizing my profits (MR = MC at this price, if I raise the price my quantity demanded will go down). So they get some more to sell. So price may stay the lower $1
Now in the buyer market across town, they're getting inundated by apples, and not many are buying them, so they simply won't even buy anymore. Only sell them for $1.50. Why not drop the price? Well, they have enough quantity supplied minus the time it takes before an apple rots and becomes unsellable that their marginal revenue equals marginal cost. They're maximizing their profits still.
Then you make ask why does the higher priced market keep selling their apples at a higher price? Who are the suckers? And why?
This is where other economic effects that could occur (when you don't state all things being equal), that there's a prestige factor from buying apples from that market compared to the cheaper market... the tents look better, its nearer to well to do peoples' home and allows you to mingle with people of means (snob appeal), perhaps they advertised how wonderful the apples are, and everyone love them, everyone's doing it. Despite the fact they're the same quality apple if not the same damn apples from the cheaper market sold to the expensive market (band wagon appeal).
The two markets are considering one can buy and sell; that the markets will always have a buying and selling price equal. Never is the case though. Often markets will never buy, most are only going to sell whatever supply they have; they have a separate whole-sell market for their buying. Or if they are primarily a selling market, but do buy, they limit their quantity buying; their buying is strictly limited, and always lower than the price at which they're selling. So if they get a flood of sellers asking them to buy their apples, they'll buy slightly lower than what they themselves are selling at, and stop buying their apples all together once they have reached a certain quantity in inventory. But they'll continue themselves to sell the apples, and at a charge up from whatever price they themselves bought at.
Markets are more complicated than described. This is just providing insight that yes in fact in short term you have price disparity where you can make money risk free. A form of rent seeking. This can happen in any markets including currency exchanges, housing, stocks, cars, etc.
The idea is that markets will eventually find some reasonable stable price that doesn't allow people to screw each other risk free for a long time, only for a little while.
But there are other possible outcomes that can make the screwing last longer, or shorter: The high price market refuses to buy apples from others, but only sell their own apples, until their quantity supplied (inventory) is low and they need more apples stocked up for sell. They advertise using various persuasive techniques. The cheap market is engaging in a price war dumping their apples, or seeks to make money off volume of sales because they have lots of supply of apples. And many other phenomena.
loudrockacdc when you have excess supply and your current demand doesn't meet the supply the price goes down so as to create more demand. So say the supply was 20 apples but the demand was for 15. You have 5 apples in excess which need to find a buyer, you will lower your price quotation per Apple to reach an equilibrium state where the supply is evenly met by demand.
this sounds like basic business to me, no ? buying low and selling high ? although i am ignorant, explaining why im here in the first place. an example with real financial situations would be more helpful in my opinion.
Japan has a share of apple for 99.99. US (on the other side of the world) has Apple trading at $100. If you have a computer program that automatically finds these price differences you could guarantee a 1 cent profit if you bought from Japan at 99.99 and sold at 100 exactly in the US
+Pratibha arora i think it's when you say take out a mortgage and buy a house then lease your house to someone for as much as your mortgage payment... you've then "hedged" your investment and the tenant is effectively buying you your house.. get it?
+Mithun Pawar Hey I love Mrs. Khan video, particularly this video about calculate arbitrage. Another resource I also found helpfull for gambling sites
is Grathaw Arbitrage Software Expert - it will be on google if you need it.
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This is just the basics in any business. Buy Low – Sell High
So people now call it “Arbitrage”. Big deal!
What is not mentioned here is how you need to firstly identify the demand and find a source to buy low.
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Performance of A-shares.
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