You could sell the item, but what's the point? You'll just get a pittance for it. This presented a problem, in that oftentimes you would end up with items worth far more than any shopkeeper would have on them. Tomorrow, his money will reset to 500 gold, as if he stopped by the bank to make a deposit (or withdrawal). If you now buy something from him, he has whatever you pay.
If you sell him 500 gold worth of goods, he has nothing left.
Let's say a merchant has 500 gold on him. In Morrowind, merchants only had so much gold on them. In order to truly understand this, we'll need to go back to Morrowind. The mercantile skill allows you to get more money for the things you sell to people. This time, I'd like to discuss the very strange state of Mercantilism. In our last installment, we were discussing the stranger skills of Oblivion. So instead, you're getting another video game-related post. While I have a bunch of studying I ought to be doing right now.