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

This guide follows the OCR A Level in Economics (H460) specification, version 3.0 (June 2026), first assessment in 2021. It covers the “Business objectives” topic, which sits in the microeconomics content under the area of study “Competition and market power”. The specification labels no part of this topic as AS or A level only. Every number below is invented for teaching and is not real data.

Go to the OCR Economics hub for the full course, tick off what you know on the printable checklist, and test yourself with the free diagnostics. The companion pages are the revision notes and the practice questions. For the wider course see the Microeconomics study guide.

What the specification asks for

Outcome (all begin “evaluate” except one)	Where it is taught
Assumptions underlying profit maximisation	Section 1
Relevance of profit maximisation to businesses	Section 1
Sales revenue, sales volume, growth and utility maximisation	Section 2
Profit satisficing, social welfare and CSR	Section 3
Explain the principal-agent problem	Section 4
Factors that influence the choice of objectives	Section 5

This guide assumes you can read a table of total revenue (TR), total cost (TC) and marginal values. Those are taught in other units, so here they are used, not rebuilt.

1. Profit maximisation

Profit is TR minus TC. A firm maximises profit at the output where it can earn the largest gap between them. In marginal terms the rule is MR = MC, reached with MC rising through MR from underneath.

Assumptions behind it, and the problem each creates:

Assumption	Why it may fail
The firm knows its demand curve and cost curves	Demand is hard to estimate and changes with rivals’ actions. Costs vary with input prices
Profit is the only goal	Owners may want a quiet life, managers may want status, the founder may want to help a community
Owners control the firm	In a large company, shareholders hire managers who may pursue their own aims
The firm acts rationally and tries to calculate MC and MR	Real decisions use rules of thumb, such as adding a fixed mark-up to cost
The time horizon is clear	Maximum profit this year can mean lower profit in later years

Worked example: Firm Alpha (illustrative)

Firm Alpha is an invented garden-furniture maker. Output (Q) is in thousand units a month. Price is £(100 − 5Q), and TC in £ thousand is 60 + 20Q + 5Q². Money columns are £ thousand.

Q	Price (£)	TR	TC	Profit
1	95	95	85	10
2	90	180	120	60
3	85	255	165	90
4	80	320	220	100
5	75	375	285	90
6	70	420	360	60
7	65	455	445	10
8	60	480	540	−60
10	50	500	760	−260

MR is 100 − 10Q and MC is 20 + 10Q. Setting them equal gives 80 = 20Q, so Q = 4. Profit is £100 thousand, the highest in the table, and the price is £80.

Is it relevant?

For: profit pays owners, funds investment and lets a firm survive. In a competitive market a firm that ignores profit may be taken over or closed. Profit is also the simplest measure to judge a firm by.

Against: most firms cannot compute MC and MR exactly. Large firms have separated ownership and control. Many firms seek profit and other goals together. A sensible judgement is that profit maximisation is a useful benchmark and a good predictor where competition is fierce and the owner runs the firm, but a poorer guide for large listed firms, social enterprises and firms with several stakeholders.

2. Alternative maximising objectives

A firm may maximise something other than profit. Using Firm Alpha:

Sales revenue maximisation. Revenue peaks where MR = 0, so 100 − 10Q = 0 and Q = 10, with TR = £500 thousand. At that output TC is £760 thousand, a loss of £260 thousand. Price is also low (£50). A firm cannot sustain this unconstrained. In practice it maximises revenue subject to a minimum profit. If shareholders demand at least £50 thousand, the highest-revenue output meeting that is Q = 6 (TR = £420 thousand, profit £60 thousand). Q = 7 gives only £10 thousand profit. Why do it? Managers’ pay and status often rise with the firm’s size, and high revenue can deter entrants.

Sales volume maximisation. The firm sells as many units as it can while still covering all costs, meaning price at least equals average cost (a normal profit). Profit must be at least zero. Profit is £10 thousand at Q = 7 and −£60 thousand at Q = 8, so the largest affordable output is Q = 7 at a price of £65. Why do it? To build market share and customer habit, to get volume discounts from suppliers, or to push out weaker rivals.

Growth maximisation. The firm aims to expand its long-run size, by sales, assets or market share, and reinvests profit to do so. Suppose capital is £2.0 million and profit is £0.5 million. If 80% is retained, capital rises by 0.8 × 0.5 = £0.4 million to £2.4 million, a growth of 20%. Growth is limited by finance, by shareholders who want dividends, and by the risk of a takeover if profit is too low. Why do it? Size brings economies of scale, market power and security.

Utility maximisation. Decision makers pursue their own satisfaction, not only the firm’s profit. A manager may gain utility from salary, status, a large staff, generous expenses or leisure. A founder may gain utility from a pleasant working life or from the reputation of the product. Output and profit then differ from the profit-maximising point, and the firm spends on things owners would not choose.

Evaluation of all four. They are most likely where owners cannot easily observe and control managers. Each is constrained by the need to earn enough profit to survive, so these objectives often work in practice as “maximise X subject to profit of at least Y”. They can all be a long-run route to profit, for example when growth creates market power.

3. Non-maximising objectives

Profit satisficing means aiming for a satisfactory level of profit, enough to keep shareholders content, and then pursuing other aims. Take Firm Alpha with a target of £80 thousand. Outputs of 3, 4 and 5 thousand all clear the target (profits 90, 100 and 90). The firm can choose any of them, perhaps the one with fewer workers or less stress, and does not search for the exact maximum. It is realistic when information is poor and decision makers have several goals. Its weakness is that it gives no precise prediction and “satisfactory” is hard to define.

Social welfare. Some organisations, such as charities, co-operatives and social enterprises, put society’s wellbeing first. They may price to cover costs only, so profit is just a means. For Firm Alpha, charging to break even (in whole thousands of units) gives Q = 7 and £65, compared with Q = 4 and £80 under profit maximisation. More people are served at a lower price, though less surplus is available to reinvest.

Corporate social responsibility (CSR) means a firm voluntarily acts in the interests of stakeholders such as workers, communities and the environment, beyond what the law requires. Examples are fair sourcing, lower emissions and local hiring.

Worked example. A firm adopts ethical sourcing at an extra annual cost of £30,000. Each unit sold earns a contribution of £6 over its variable costs. It must sell 30,000 ÷ 6 = 5,000 extra units to cover the cost.

Evaluation. CSR can win customers, attract staff, reduce the risk of bad publicity and protect the brand, so it can raise long-term profit. But it can be costly, and some claims are only marketing (“greenwashing”). Whether it is a genuine departure from profit seeking or a tool for it depends on the firm’s motive and evidence.

4. The principal-agent problem

A principal hires an agent to act on their behalf. Shareholders (principals) hire managers (agents). The problem arises because:

1. The two have different objectives. Shareholders want profit and share value. Managers may want pay, power and a quiet life.
2. There is asymmetric information. Managers know more about the firm than shareholders do.
3. Managers’ actions are hard to monitor, so they can take decisions that benefit themselves, a form of moral hazard.

The outcome may be lower profit, wasteful spending or excessive risk taking or avoidance. The same logic applies elsewhere, such as the owner and a worker, or a government and a public-sector manager.

Solutions. Performance-related pay, share options, bonuses linked to long-term results, monitoring and audits, independent non-executive directors, shareholder votes on pay, and the threat of takeover all narrow the gap.

Worked example: a bonus that points the wrong way

A manager receives 3% of the year’s profit as a bonus. Two options, with profits in £ million over five years (illustrative):

Year	1	2	3	4	5	Total
Option X: cut research	4.0	3.2	2.6	2.0	1.6	13.4
Option Y: keep research	3.0	3.4	3.8	4.2	4.6	19.0

Under a one-year bonus the manager gets 3% × £4.0 million = £120,000 with X, against £90,000 with Y, so X is chosen. Shareholders prefer Y, whose five-year profit is £5.6 million higher. If the bonus is paid on average profit over five years, the manager gets 3% × £2.68 million = £80,400 with X and 3% × £3.8 million = £114,000 with Y, so the incentive now matches the shareholders’ interest.

Evaluation. Incentives work only if profit is measurable and cannot be manipulated, and they raise pay costs. Monitoring itself costs money. Whether the problem is serious depends on how widely held the shares are, how strong the board is and how easily managers can be replaced.

5. Factors that influence the choice of objectives

Factor	Effect on objectives
Ownership and legal form	A sole trader may satisfice. A listed company faces shareholder pressure for profit. A co-operative or charity may stress social welfare
Separation of ownership and control	The wider it is, the more room for managers’ revenue, growth or utility goals
Market structure and competition	Strong competition forces profit and efficiency. Weak competition allows slack
Stage of the business	A new firm needs survival and sales. A mature firm can pay dividends
Financial position and access to finance	A firm in difficulty prioritises survival. A cash-rich firm can afford growth or CSR
Stakeholder and public pressure	Consumers, staff and regulators can push firms toward CSR
Economic conditions	In a downturn firms focus on survival and break-even

Evaluation. The most important factor is usually who has control and what constraints they face, since competition and capital markets can override personal preferences. Objectives also change over time: a start-up may maximise sales, then growth, and later profit. Examine the firm’s size, ownership and market before judging.

Common errors

• Defining profit maximisation as “making as much money as possible” without the MR = MC condition.
• Treating revenue maximisation and profit maximisation as the same output. Revenue peaks at a higher output.
• Describing the principal-agent problem as “workers dislike managers”. It is about divergent aims and unequal information.
• Calling every CSR action charity. Evaluate motive and effect on profit.
• Listing objectives without judging which fits the firm in the question.

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.