OCR A Level Economics: Resource allocation, economic systems and objectives (H460) – Revision Notes

These notes condense the topics Allocation of resources and The objectives of economic agents from the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. They sit in the area of study How competitive markets work. Full explanations are in the study guide, and original questions with worked answers are in the practice set. Course pages: the OCR Economics hub and the checklist. Check your level with the free 10-minute diagnostics. Every figure below is invented.

Key definitions

Term	Meaning
Resource allocation	How scarce resources are shared between competing uses: what, how and for whom
Incentive	A reward or penalty that changes the pay-off of a choice
Price mechanism	Prices signal, ration and give incentives
Market economy	Private decisions coordinated by prices; private ownership
Planned economy	A central authority decides allocation; mostly state ownership
Mixed economy	Market and government both allocate; the proportion varies
Economic agent	A consumer, worker, firm or the government
Maximisation	Choosing the option that gives the greatest value of an objective, subject to a constraint
Satisficing	Aiming for a satisfactory outcome rather than the maximum

Incentives in brief

• Financial: wages, bonuses, profit, subsidy, tax, fine, charge.
• Non-financial: satisfaction, recognition, reputation, safety, leisure.
• Chain: incentive changes pay-off, so behaviour changes, so resources move.
• Effectiveness depends on: elasticity, information, time, other motives, side effects, cost, who is affected.

Method for an incentive calculation

1. Find the % change in price: (new − old) ÷ old × 100.
2. Multiply by PED to get the % change in quantity.
3. Apply it to the old quantity.
4. Compare revenue or cost before and after.

Reminder. Town K (illustrative) raises a parking charge from £5.00 to £6.00 a day. Daily use is 2,500 cars and PED is −0.4.

% change in price = (6.00 − 5.00) ÷ 5.00 × 100 = +20%
% change in quantity = −0.4 × 20 = −8%
New use = 2,500 × 0.92 = 2,300 cars
Revenue = 5.00 × 2,500 = £12,500 → 6.00 × 2,300 = £13,800

The charge cuts use by 200 cars but raises revenue by £1,300. It changes behaviour only a little and works mostly as a source of revenue.

Three ways to allocate resources

	Market	Planned	Mixed
Who decides	Households and firms	Central authority	Both
Main signal	Prices and profit	Plans and targets	Prices plus rules
Ownership	Private	State	Both
Strengths	Efficient signals, choice, innovation	Social aims, quick direction of resources	Corrects market failure, keeps price signals
Weaknesses	Externalities, inequality, public goods missing, monopoly	Information problem, weak incentives, waste, little choice	Government failure, tax disincentives, hard to set the balance

Price mechanism chain (market)

A rise in demand lifts price. Profit then draws in extra output and extra inputs, and the price eases back as supply extends.

Shortage under a fixed price

Reminder with new figures. In Country Q (illustrative) demand is Qd = 1,200 − 40P and supply is Qs = 600 + 20P.

Equilibrium: 1,200 − 40P = 600 + 20P → 600 = 60P → P = 10, Q = 800
Fixed price £7: Qd = 920, Qs = 740 → shortage 180
Fixed price £16: Qd = 560, Qs = 920 → surplus 360

A price below equilibrium creates a shortage. A price above it creates a surplus. In a planned system the gap is closed by rationing or by changing the plan, since price does not move on its own.

Evaluation checklist for systems

• Which goal matters: choice and growth, or equality and security?
• How good are information and institutions?
• How large is the state, and what does it do (provide, tax, regulate)?
• Short run or long run?
• Judgement: most economies work best when the market is the main allocator and the government corrects its failures, but the right balance is a matter of values.

Objectives of economic agents

Agent	Typical objective	Constraint
Consumer	Maximise utility	Income and prices
Worker	Wage, security, satisfaction, leisure	Skills, job market
Firm	Profit, revenue, sales volume, growth; or satisficing, survival, social goals	Demand, costs, competition
Government	Growth, jobs, stable prices, fairer incomes, environment	Budget, conflicts between aims

Rules for finding each maximum

Objective	Rule
Utility	Equalise MU per £ across goods at the margin and spend the whole budget
Profit	Produce while MR ≥ MC
Revenue	Produce while MR > 0
Sales volume	Produce as much as possible with profit not below zero (AR ≥ AC)

Reminder. A small bakery (illustrative) faces P = 80 − 5Q and TC = 60 + 10Q.

Q	P	TR	MR	TC	Profit
6	50	300	25	120	180
7	45	315	15	130	185
8	40	320	5	140	180
9	35	315	−5	150	165

Marginal cost is £10 for each unit. Profit maximisation gives Q = 7, profit £185. Revenue maximisation gives Q = 8, TR £320, profit £180. For sales volume with no loss, Q = 13 gives TR £195 against TC £190, a profit of £5, while Q = 14 gives a loss of £60. So volume is maximised at 13.

Evaluating objectives

• Profit: clear, but needs good information and owner control.
• Revenue, volume, growth: suit managers and market share goals, at the cost of profit.
• Satisficing and ethical aims: realistic, harder to model.
• Consumers: not always rational, so utility maximisation is a simplification.
• Government: aims conflict, so weights are value judgements.

Government objectives and conflicts

Objective	Why it matters	Possible conflict
Economic growth	Higher output and incomes	Faster growth can raise inflation or harm the environment
Low unemployment	Wasted labour is avoided, incomes are secure	Can sit uneasily with stable prices in the short run
Stable prices	Protects savings, helps planning	Tight policy to hold prices can slow growth
Fairer income	Reduces inequality	High taxes may weaken incentives to work
Environment	Protects future output	May cost output and jobs now

The weight given to each aim is a value judgement. A strong answer says which aim matters most in the context and why.

Worker and firm objectives, in short

• Workers: a higher wage, job security, satisfaction, flexible hours, promotion. A worker often accepts a lower wage for a better job, so pay is not the only objective.
• Firms: profit is the usual assumption. Owners and managers may differ, because managers often prefer growth or revenue, which raises their own pay and status.
• Why firms may not maximise: costs and demand are hard to know, owners cannot watch managers closely, and some firms have ethical or social aims.

Planned economy problems, as chains

1. No market prices, so planners lack a signal of what is scarce.
2. Targets are set from incomplete information, so shortages and surpluses appear.
3. Rewards are weakly linked to effort, so output, quality and innovation suffer.

Must-know distinctions

• Allocation (who gets resources) is not the same as production (making goods).
• A shortage under a planned price is not the same as a surplus under a market price. They are different sides of equilibrium.
• Maximisation of revenue is not maximisation of profit. MR = 0 against MR = MC.
• A mixed economy is a range, not a single point.

Quick self-test

1. Define resource allocation.
2. Name two non-financial incentives for a worker.
3. Fares fall by 10% and PED is −0.8. What is the % change in trips?
4. State the three jobs of the price mechanism.
5. Why do planners face an information problem?
6. In Country R (illustrative) the government spends £210bn in a GDP of £700bn. What is its share?
7. At an output of 6, MR is 25 and MC is 10. Should a profit maximiser produce the 6th unit?
8. At which MR value is revenue at its maximum?
9. A consumer’s last good X gives 8 utils per £ and the last good Y gives 6. What should she do?
10. Give one reason why a satisficing firm may not maximise profit.

Answers

1. The way scarce resources are shared between competing uses.
2. Any two of: job satisfaction, recognition, flexible hours, safety.
3. −10% × −0.8 gives +8%.
4. Signal, ration and give incentives.
5. They lack full knowledge of wants, costs and changes in conditions, and have no price signals to guide them.
6. 210 ÷ 700 × 100 = 30%.
7. Yes. MR 25 is above MC 10, so the unit adds to profit.
8. Where MR is zero, or where it changes from positive to negative.
9. Shift spending from Y to X until MU per £ is equal.
10. Managers may prefer a quiet life, a satisfactory return, or other goals such as ethical aims or growth.

Where marks are usually lost

• Writing “resources are scarce” with no link to how they are allocated.
• Quoting an incentive with no chain showing how allocation changes.
• Forgetting that elasticity decides how large the effect is.
• Describing planned and market systems with no weighing.
• Treating price-fixing as a market outcome.
• Using the wrong rule for each maximum.
• Leaving out the constraint when defining maximisation.
• Concluding without a judgement tied to the context.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, Component 1 content, area of study How competitive markets work.