Consider the supply and demand for oranges.

Orange crops can be destroyed by below-freezing temperatures.

a. If a weather report states that oranges are likely to freeze in a storm later this week, what probably happens to the demand for oranges today, before the storm comes?

b. According to a simple supply-and-demand model, what happens to the price of oranges today given your answer to part a.

c. How does this illustrate the idea that stock prices today “bake in” information about future events? In other words, how is a share of Microsoft like an orange? (Note: Wall Street people often use the expression “That news is already baked into the price” when they talk about the efficient markets hypothesis.)  kio25