Chapter 10 - LARGE ECONOMIES

Abstract

This chapter reviews large economies. For theories of large economies to be developed, the number of agents must be very large. This largeness can be modeled in a number of ways, each of which operates with an infinity of economic agents. A first, predominantly technical, reason for turning to large economies, thereby shifting the attention from individual actions to mass phenomena, is that large numbers have a convexifying effect, so that in large economies some results hold without the convexity assumptions that are often crucial in usual finite economies. The most important aspect of large economies is that they provide the framework for new and fundamental insights to economic theory. In an exchange economy, core allocations can be considered as outcomes of exchange processes. It turns out that Walras allocations belong to the core and when the economy grows large, the set of core allocations approaches the set of Walras allocations, so that a core allocation will look as if it were obtained through trading in the market at a given price. Thus, the idea of the price system emerging from individual exchanges is vindicated in a modern theoretical framework.