S.H.
Parents do not invite "EVERYONE" because either (1) they can't afford it & everyone has a budget or they have more than 1 child to have parties for during the year (2) "overages" are charged for larger parties (3) their own child perhaps only plays with some of the kids (4) the comfort level socially with some parents/kids and not others. (5) personal preference for small gatherings, versus a "party" with tons of people.
As your child gets toward preschool and Elementary school... the class sizes can be daunting and it is just not reasonable to invite everyone... and by that age, a child WILL have an opinion on who they consider their friend or not or like or don't like... and it is really not practical nor affordable to invite every single child. The Teacher KNOWS how to facilitate this and they have "tips" and rules on it and "how" to give out the invitations. In my daughter's classes... the parents were instructed to give "invitations" to them, and that the Teacher would disperse them to the children, privately, and/or children usually have "mail boxes" in the classroom for their own papers to take home. At least in my daughter's classes, this is how it is.
I don't think ALL parents expect to be invited.... most know it is a cost factor as well. Myself, I have never had a child's party that big, or at 2 years old. And some parents I know, do not even have a "birthday party" thing... until their child is older, like 4 years old... when they are in Preschool.
You invite who you want... and are comfortable with AND whom your child tends to play with more and regards as a "friend." But at this age, its more for the Parents.
If you want to invite everyone... that is fine and there is nothing wrong with that... but also remember that it is COMMON that with Birthday parties... some are invited, and some aren't.... because at least for me, it has to do with who my own child feels comfortable with and considers as her "Best" friends and just plain budget.
But really, there are no 'rules' except that down the road... usually parties get bigger as your child grows up...
or as we do with my daughter, who is 6 years old now, we "limit" party size to 12 kids and their parents. We don't invite the entire 1st grade class... and nor do the other parents. I ask my daughter, and one year she said she didn't even want a party, she just wanted to be with us and a cake. So it can vary.
Good luck,
Susan