ARBITRAGE AND THE FLATTENING EFFECT OF LARGE NUMBERS

In a model of an exchange economy with a continuum of individuals, we show that competitive equilibrium can be regarded as resulting from th e elimination of arbitrage opportunities. Generically, the elimination of such opportunities results in a phenomenon we call the ''flattenin g effect of large numbers.'' The flattening effect provides a precise meaning to the statement that under perfect competition individuals ca nnot influence prices; they face perfectly elastic demands and supplie s. The attractive geometry associated with arbitrage and the flattenin g effect is highlighted in several figures. We also link the demonstra tion of equilibrium through arbitrage with the logic of marginalism. ( C) 1998 Academic Press.