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| Author: | Makowski, L. Ostroy, J. M. |
| Title: | Arbitrage and the flattening effect of large numbers |
| Journal: | Journal of Economic Theory
1998 : JAN, VOL. 78:1, p. 1-31 |
| Index terms: | ARBITRATION THEORIES |
| Language: | eng |
| Abstract: | In a model of an exchange economy with a continuum of individuals, it is shown that competitive equilibrium can be regarded as resulting from the elimination of arbitrage opportunities. Generically, the elimination of such opportunities results in a phenomenon we call the "flattening effect of large numbers." The flattening effect provides a precise meaning to the statement that under perfect competition individuals cannot influence prices; they face perfectly elastic demands and supplies. The attractive geometry associated with arbitrage and the flattening effect is highlighted in several figures. The demonstration of equilibrium through arbitrage with the logic of marginalism is also linked. |
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