C'mon...she's a Draenei, how was I supposed to xmog her?
Well, arbitrage is just a fancy word for taking money and making more money with zero risk. Buying low and selling high on the AH (or the stock market) is not arbitrage because there is risk involved: prices can fall, people might not buy, or you might repost so many times that posting fees are more than your profit. However, an example of arbitrage is finding something on the AH that vendors for more that you could buy it for. In short, it means absolutely zero-risk profit, however minimal that profit is. Auctioneer has a search function for this (oddly it's not the one titled "Arbitrage;" that tool is for cross-faction trading, which is not true arbitrage. It's the "Vendor" one.) This is also a great way to get start-up cash for a fresh toon on a new server.
Arbitrage at its purest. Immaculate Scepter: Bid-23g. Vendor-26g.
The Inscription arbitrage, the one I leveled my priest for, is pretty awesome, has been around since 5.0 launch day, and in essence, sets a price floor on the price of herbs. It keeps them in check and ensures that herbalism is always a profitable profession. It's not new, but it's a great tool if you aren't aware of it.
The way it works: any time herb prices drop below 1g 50s per herb, inscriptionists can mill the herbs, turn them into inks, and then craft any of the blue shoulder enchants. The cool thing is that rather than auctioning them, you vendor them since their vendor price is so high. You'll come out making a little bit or a decent amount more than you started with, depending on whether you're in a level 25 guild or not.
Note: As of 5.3 this strategy no longer works. Shoulder enchants vendor price have been reduced from 18g to 1.8g. Whamp whamp.
Best thing is that you don't have to deal with the hassel of auctioning, so it's immediate profit. The gravy, or arguably the main course, is that you'll have several stacks of Starlight ink out of the deal. As you can tell from the link, these sell for between 50g and 150g each, so a stack is about 1000-3000g. Wowhead claims that the milling yield for misty pigment is a 25% chance at between 1-3 (24%, 0.6%, 0.6%, respectively). In short, blah blah blah "expect about 1 Starlight ink per stack you buy."
Shh. get on with it.
So, in order to do this, you need to have an inscriptionist at lvl 80 with inscription at lvl 540.
Over the course of my leveling, I've scanned the AH while waiting on Tank queues and was able to buy 150 stacks of green tea leaves at between 1.5g and 2.0g. I use TradeSkillMaster Destroyer, with even stacks unchecked, it's a great search tool that puts all the herbs in one place. While, I had some rain poppy and other miscellaneous herbs, really, the green tea was exactly 150 stacks: 3000 herbs on the button. How perfect was that for testing?!
I did this in two milling sessions, and must have crafted something that required starlight ink out of boredom unfortunately, because the numbers there just seem off, but in all, the test was a success. She milled 107 misty pigments, which I split and posted half as ink and half as pigments, for a total of about 7500g. She also crafted 248 shoulder enchants, which vendored for 4,600g.
There's a really interesting lesson here though that I haven't read anywhere else. If I want to do this long term, and assuming I can find buyers/uses for starlight ink, I am willing to pay much much more than 1.5 for herbs. Granted, it's goes out of the realm or classic arbitrage beyond that price point, but call me a greedy risk taker. In fact, from the ROI above we know that, combined with the cost assumption that I paid 2g/herb (that's the "150x40g" thing), I'm willing to pay 100% more than that, or 4g per herb, which, although ridiculous sounding for green tea leaves makes sense when you consider the idea that, with this process, every stack of herbs gives you one free starlight ink. In short, the question everyone should be asking is, "how much more would I pay for a stack of herbs if every stack gives me a free rare Ink?"
Anyways, hope this helps and gives perspective, and when looking at my numbers, please remember that my pigment/rare ink numbers were about 50% less than what they should have been, for whatever reason. i.e. I was expecting an ROI of about 160%.
Don't level at 3AM. Your scribe eats your ink.