OCR A Level Economics: Business objectives and the principal-agent problem (H460) – Revision Notes

These notes condense the “Business objectives” topic of the OCR A Level in Economics (H460) specification, version 3.0 (June 2026), first assessment in 2021. For full explanations and the worked example of Firm Alpha, read the study guide. Practise with the practice questions, see the OCR Economics hub, use the checklist, and find gaps with the free diagnostics. All figures here are invented for teaching.

The six outcomes at a glance

Outcome	One-line summary
Assumptions of profit maximisation	Known demand and costs, single aim, owner control, rational calculation
Relevance of profit maximisation	Good benchmark, weaker for large or social firms
Maximising alternatives	Revenue, sales volume, growth, utility
Non-maximising objectives	Satisficing, social welfare, CSR
Principal-agent problem	Agents act for principals but have different aims and more information
Factors affecting choice	Ownership, control, competition, finance, stakeholders, conditions

Key definitions

Learn these wordings, since each evaluation answer builds on them.

• Profit is TR minus TC. Profit maximisation is the output where MR = MC and MC cuts MR from below.
• Normal profit is the minimum needed to keep resources in the business.
• Revenue maximisation is the output where MR = 0.
• Sales volume maximisation is the largest output with price at least equal to average cost (profit of at least zero).
• Growth maximisation is expanding long-run size, funded by retained profit and borrowing.
• Utility maximisation is the decision makers pursuing their own satisfaction: pay, status, leisure, a pleasant working life.
• Satisficing is aiming for a satisfactory profit and then pursuing other goals.
• Social welfare objective is putting society’s gain first, often covering costs only.
• CSR is voluntary action for stakeholders beyond legal requirements.
• Principal-agent problem is where the agent’s aims differ from the principal’s and information is unequal.

Assumptions of profit maximisation

1. The firm knows its demand and cost curves.
2. Profit is the only objective.
3. The firm is run by its owners, with no agency problem.
4. Decision makers are rational and can calculate MR and MC.
5. Time horizon is clear, with no conflict between short-run and long-run profit.

Evaluation chain: each assumption fails in practice, but profit still matters because it pays investors, funds growth and ensures survival. So it is a benchmark more than a literal description. It predicts best in competitive markets with owner-managers and worst for large listed companies and not-for-profit bodies.

Comparing objectives with one data set

Firm Gamma (illustrative): price £(60 − 3Q), TC = 30 + 12Q + 3Q², Q in thousand units, money in £ thousand.

Q	Price	TR	TC	Profit
2	54	108	66	42
3	51	153	93	60
4	48	192	126	66
5	45	225	165	60
6	42	252	210	42
7	39	273	261	12
8	36	288	318	−30
10	30	300	450	−150

• Profit maximum: MR = 60 − 6Q and MC = 12 + 6Q, so Q = 4, price £48, profit £66 thousand.
• Revenue maximum: MR = 0 gives Q = 10, TR = £300 thousand, but a loss of £150 thousand.
• Revenue maximum with profit of at least £40 thousand: Q = 6, TR = £252 thousand.
• Sales volume maximum: Q = 7 (profit £12 thousand). At Q = 8 the firm makes a loss.
• Satisficing at a target of £50 thousand: Q = 3, 4 or 5 all qualify.

Pattern to remember: output rises from profit maximum, to revenue maximum with a profit constraint, to sales volume maximum, and price falls with it. Unconstrained revenue maximisation is the largest output of all and is usually loss-making.

Method boxes

Finding an objective’s output from a table

1. Work out profit as TR − TC for each row.
2. Profit maximum: the highest profit.
3. Sales volume: the highest output where profit is not negative.
4. Revenue with a constraint: the highest TR among rows meeting the profit floor.
5. Satisficing: list every row at or above the target.

Growth from retained profit

1. Retained profit = profit × retention rate.
2. New capital = old capital + retained profit.
3. Growth rate = retained profit ÷ old capital × 100.

Worked reminder: capital £5.0 million, profit £1.0 million, 60% retained. Retained £0.6 million, new capital £5.6 million, growth 12%.

Cost of CSR in units Extra units needed = extra annual cost ÷ contribution per unit. A £24,000 cost with a £4 contribution needs 6,000 units.

Principal-agent problem

Feature	Detail
Principals and agents	Shareholders and managers. Also owners and employees, or a government and a public body
Cause	Different aims, asymmetric information, costly monitoring
Consequences	Lower profit, high pay or perks, short-termism, poor risk choices
Solutions	Performance-related pay, share options, long-term bonus, audits, non-executive directors, shareholder votes, takeover threat
Limits of solutions	Monitoring costs, profits can be manipulated, bonuses can encourage short-term focus

Reminder. A bonus on one year’s profit can lead a manager to cut research or training to lift this year’s profit. A bonus on a multi-year average aligns the manager better with shareholders. Check any bonus rule against what the manager can control in the short term.

Non-maximising objectives: evaluation points

• Satisficing: realistic when information is poor and goals compete. But “satisfactory” is vague, so the theory predicts less well.
• Social welfare: serves a wider group and often means lower prices or more output. But reinvestment is limited and efficiency may weaken without a profit motive.
• CSR: can protect the brand, attract staff and reduce risk, so it may raise long-run profit. It can also be costly, partial or marketing only.

Factors influencing the choice

Ownership and legal form; the gap between ownership and control; strength of competition; stage of the business; financial health; stakeholder and public pressure; the economic cycle. The judgement usually turns on who holds control and what constrains them.

Quick self-test

1. State two assumptions behind profit maximisation.
2. Using the Firm Gamma table, state the profit-maximising output and profit.
3. What output would Firm Gamma choose to maximise sales volume?
4. Firm Gamma maximises revenue subject to profit of at least £40 thousand. State the output and TR.
5. Firm Gamma satisfices with a target of £50 thousand. Which whole-number outputs are acceptable?
6. A firm has capital of £5.0 million and profit of £1.0 million, and retains 60%. Find the growth rate of capital.
7. Define the principal-agent problem in one sentence.
8. A manager is paid 5% of profit. Profit is £6.0 million. Find the bonus.
9. A fair-pay policy costs £24,000 a year and each unit sold earns a £4 contribution. How many extra units cover the cost?
10. Give two ways a company could reduce the principal-agent problem.
11. Explain why the revenue-maximising output exceeds the profit-maximising output.
12. Give one factor that makes a firm more likely to pursue growth than profit.

Answers

1. Any two of: known demand and costs, profit is the only aim, owners control the firm, rational calculation of MR and MC.
2. Q = 4 thousand units, profit £66 thousand.
3. Q = 7 thousand units (profit £12 thousand, and Q = 8 gives a loss).
4. Q = 6 thousand units, TR = £252 thousand.
5. Q = 3, 4 and 5 thousand units (profits 60, 66 and 60).
6. Retained profit = 0.6 × 1.0 = £0.6 million. Growth = 0.6 ÷ 5.0 = 12%.
7. Agents who act for principals may pursue different aims, and the principal cannot fully see what they do.
8. 0.05 × £6.0 million = £300,000.
9. 24,000 ÷ 4 = 6,000 units.
10. Any two of: bonuses on long-term results, share options, audits and monitoring, independent directors, shareholder votes on pay.
11. Revenue rises as long as MR is positive, while profit stops rising once MR falls to MC, which happens while MR is still positive. So revenue peaks at a higher output.
12. Any one of: managers with pay linked to size, widely held shares, weak shareholder control, a market where scale gives market power.

Where marks are usually lost

• Stating “profit maximisation means maximum money” without MR = MC.
• Giving a list of objectives with no link to the firm in the question.
• Assuming revenue maximisation gives the same output as profit maximisation.
• Forgetting that sales volume maximisation is limited by covering costs.
• Describing the principal-agent problem without naming both the divergent aims and the information gap.
• Offering solutions with no evaluation of their cost or side effects.
• Treating CSR as always unprofitable, or always profitable, rather than weighing it.
• Ending an evaluation question without a judgement that turns on a stated factor.
• Quoting a number without its unit, such as £ thousand, £ million or a percentage sign.
• Naming a solution to the principal-agent problem but not saying how it changes the agent’s incentive.

Official syllabus

The source document is the OCR A Level in Economics (H460) specification, version 3.0 (June 2026), first assessment in 2021, published by OCR.