Question

You are watching a national news broadcast. It is reported that an early snowstorm is heading for North Carolina State and that it will likely destroy much of this year’s apple crop. Your roommate says, “If there are going to be fewer apples available, I’ll bet that apple prices will rise. We should buy enormous quantities of apples now and put them in storage. Later we will sell them and make huge profits.”

If this information about the storm is publicly available so that buyers and sellers in the apple market expect the price of apples to rise in the future, what will happen immediately to the supply and demand for apples and the equilibrium price of quantity of apples? Can you “beat the market” with public information? That is, can you use publicly available information to help you buy something cheap and quickly sell it at a higher price? Why or why not?

Answer 1

It is clear that supply of apples will shift left and prices will increase due to snowstorm. If everyone is immediately trying to buy apples expecting to sell later at high price then first demand shifts right and apple prices start going up immediately and will keep going up. Ewquilibrium price starts going up immediately.

If public information is there then it is difficult to manipulate prices. If government decides to import apples and reduces tariff then even when there is shortage apple prices may not go up as expected and market cannot be beaten and losses will be incurred. As information is public everyone behaves predictably and it is difficult to beat the market as people may shift to substitutes if prices are very high.