Entrepreneurship as Arbitrage

Following Kirzner's idea of entrepreneurship as the observation of an unexploited profit opportunity, entrepreneurship can be thought of as arbitrage: buying at one price and selling at a higher one. For example, someone might notice that apples sell for $0.75 in one city and $1 in a nearby one. A profit opportunity exists because apples can be purchased for $0.75 and sold for $1. To actually engage in the entrepreneurial act, however, will take production and time. The entrepreneur will have to buy or rent a truck to transport the apples, which will result in some expense, and there may be spoilage as the apples are shipped, further reducing the entrepreneur's profit. Taking production into account, there is no profit opportunity if it costs $0.25 or more to ship the apples from one city to the other.

Time is also a factor. By the time the entrepreneur actually gets the apples to the second city, it may be that the price of apples has fallen there, so the apples can only be sold for $0.85. If the shipping cost is $0.10 or more per apple, what at first appeared to be a profit opportunity will have turned out to result in a loss. Because an economy is always evolving, economic conditions will necessarily be different by the time the innovation is acted upon.

--Randall G. Holcombe, Advanced Introduction to the Austrian School of Economics, Elgar Advanced Introductions (Cheltenham, UK: Edward Elgar Publishing, 2014), 26.