What does the term "arbitrage" refer to in economics?

Arbitrage refers to the practice of taking advantage of price differences for the same asset in different markets. When an asset is priced lower in one market and higher in another, a trader can buy in the cheaper market and sell in the more expensive one, profiting from the price discrepancy. This concept is foundational in economics and finance as it helps ensure that prices do not remain out of equilibrium for long periods.

The key characteristic of arbitrage is that it capitalizes on inefficiencies in the market, leading to a more balanced price across the markets involved. It's a strategy that requires quick action and access to multiple markets in order to exploit these brief opportunities. Since arbitrage involves transactions across different markets, it inherently carries less risk compared to speculative trading, as the transactions are typically executed simultaneously.