Perfect competition is an economic theory of firms. Firms that meet in different levels of competition, respond in different ways, this is depending on the type of rivalry they will encounter. Whether it is price or cost of production through economies of scale (not as likely to exist in perfect competition), the product through technological advances or any other form of competing. Perfect competition does not actually exist as in the real world only monopolistic competition is seen. This is because there is not completely perfect knowledge and products are not homogeneous as they can be distinguished or differentiated in to different categories through price or quality.
             The characteristics of perfect competition are:
             A large number of buyers and sellers
             A large number of buyers and sellers must be present and firms must have a small share of the market. This means that there should not be a dominating monopoly power that could have an influence on the price of the product. Products should be homogeneous or identical to one another and consumers should realise this. Producers and consumers should be aware of prices and quantities sold within the market in order for the consumer to decide on which product to purchase. Barriers to entry and exit should not exist, making it very easy to set up businesses within the market. Due to some of these characteristics firms in perfect competition should be price takers as they are not large enough to have a say in the price they choose to charge. Therefore the firm should charge the going rate in the market and no more or less in order for the market as a whole to benefit. Firms can however have a say on the quantity they choose to produce and so can reduce the marginal cost of production. Due to rivalry power being dramatically reduced in perfect competition there is no need for advertisement as perfect knowledge already exists and th
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