OCR A Level Economics: Resource allocation, economic systems and the objectives of economic agents (H460)

This guide covers two topics in the area of study How competitive markets work, in the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. The topics are Allocation of resources and The objectives of economic agents, both in the microeconomics content. The specification does not label any of this as AS or Extension, so all of it is A Level content. All figures and countries below are invented for practice.

Course pages: the OCR Economics hub and the checklist. Find your weak spots with the free 10-minute diagnostics. Then use the revision notes and the practice set.

What this unit covers

Topic	You must be able to
Allocation of resources	Explain resource allocation. Explain and evaluate the effect of incentives on behaviour and allocation. Explain how market, planned and mixed economies allocate resources. Evaluate the advantages and disadvantages of each.
The objectives of economic agents	Explain maximisation, using examples. Identify possible objectives of economic agents. Evaluate the different objectives.

1. Resource allocation

Resources are scarce and wants are unlimited, so every economy has to decide how resources are used. Resource allocation is the way scarce resources are shared out between competing uses. Three questions sit behind it:

• What is produced, and in what quantities?
• How is it produced, with which mix of land, labour, capital and enterprise?
• For whom is it produced, meaning who gets the output?

Every answer has an opportunity cost, because using a resource in one way means giving up its next best use. An economy that allocates resources well gets more of what people value from the same inputs. An economy that allocates them badly wastes inputs or produces what people do not want.

2. Incentives

An incentive is a reward or a penalty that changes the pay-off of a choice, so that an economic agent behaves differently.

Type	Examples	Agent affected
Financial reward	Higher wage, bonus, profit, subsidy, tax cut	Workers, firms, households
Financial penalty	Tax, fine, charge, higher price	Consumers, firms
Non-financial	Job satisfaction, recognition, reputation, safety, free time	Workers, consumers, firms

How incentives change allocation. A rise in the price of a good rewards producers, so more resources move into it. It also penalises buyers, so some switch away. Profit pulls resources towards industries where output is wanted. A higher wage in one occupation pulls workers towards it. A subsidy cuts a firm’s costs and encourages production. A tax raises costs and discourages it.

Worked example: a fare cut

The bus operator in Country A (illustrative) cuts the fare from £4.00 to £3.20 to encourage people out of cars. Trips are 50,000 a week. Price elasticity of demand (PED) is −0.6.

% change in price = (3.20 − 4.00) ÷ 4.00 × 100 = −20%
% change in quantity = PED × % change in price = −0.6 × −20 = +12%
New trips = 50,000 × 1.12 = 56,000
Revenue before = £4.00 × 50,000 = £200,000
Revenue after  = £3.20 × 56,000 = £179,200   (down £20,800)

The incentive works, because 6,000 more trips are made. Demand is inelastic, so it works weakly and the operator loses revenue.

Evaluating the effectiveness of incentives

Judge an incentive on these points:

• Size and elasticity. An incentive works more where demand or supply is elastic, as with goods with many substitutes. It works less for necessities.
• Information. Agents must know about the incentive and understand it.
• Time. Habits change slowly, so the short-run effect can be small and the long-run effect larger.
• Other motives. Non-financial motives, such as habit or the pride of a worker, can outweigh money.
• Side effects. A badly designed reward can cause the wrong behaviour. Paying by output can push workers towards quantity over quality.
• Cost. A subsidy has to be paid for, and fines need monitoring.
• Who is affected. A fixed charge takes a bigger share of a low income.

A balanced answer says when the incentive is likely to work and judges how far it changes allocation.

3. How economies allocate resources

Market economy

Households and firms decide, and prices coordinate them. Prices do three jobs. They signal where resources are wanted, they ration limited goods to those willing and able to pay, and they give incentives to producers through profit. Resources are privately owned.

Chain of reasoning: stronger demand lifts the price, which lifts profit. Firms expand and bid for inputs, so resources move into the good until the shortage ends.

Planned economy

A central authority decides what is produced, how and for whom, through output targets and directed resources. Resources are mostly state owned. Prices are set by the planners.

Mixed economy

Both are used. The private sector allocates most goods through prices. The government provides some goods directly, taxes, subsidises and regulates. Every real economy is mixed. They differ in the proportion of the two.

Worked example: a fixed price against a market price

In Country P (illustrative) demand for a basic food is Qd = 1,500 − 50P and supply is Qs = 200 + 50P, with quantity in tonnes and price in £.

Market equilibrium: 1,500 − 50P = 200 + 50P → 1,300 = 100P → P = £13
Q = 1,500 − 50(13) = 850 tonnes (supply gives 200 + 650 = 850)
Planners fix the price at £10:
Qd = 1,500 − 500 = 1,000     Qs = 200 + 500 = 700
Shortage = 1,000 − 700 = 300 tonnes

Picture price up the side and quantity along the base. The downward demand curve crosses the upward supply curve at £13 and 850. A fixed price at £10 lies below that point, and the horizontal gap between the curves at £10 is 300. In the market the price rises, which rations the 850 tonnes and gives farmers an incentive to produce more. Under the plan, the shortage must be handled by queues, rationing or planners changing the target. Planners need good information to set the right price.

If planners had fixed the price at £16, then Qd = 700 and Qs = 1,000, which leaves a surplus of 300 tonnes.

Evaluating the three types

	Advantages	Disadvantages
Market	Prices signal and ration without a central body. Profit and competition push firms to cut costs and innovate. Consumer choice.	Ignores external costs and benefits. Under-provides goods that cannot be charged for. Can produce large inequality. Monopoly power. Short-term focus.
Planned	Can aim at social goals, such as equality or full employment. Can direct resources at once to priorities.	Planners lack information about wants. Weak incentives to work, cut costs or innovate. Shortages, surpluses and waste. Limited choice. Bureaucracy.
Mixed	Combines price signals with correction of market failure. Redistribution and public goods.	Government failure, such as poor information or lobbying. Tax can reduce incentives. The right balance is hard to judge.

Judging the extent. Which system is best depends on the goal. If the goal is variety and growth, markets do well. If it is equality or fast mobilisation, planning can do well. It also depends on the quality of institutions and on how large the state is.

Measuring the mix. Country M (illustrative) spends £180bn of government money in a GDP of £600bn, which is 30%. Country N spends £264bn in a GDP of £550bn, which is 48%. Both are mixed, and N is nearer the planned end. The share alone does not show how much of the rest is regulated or directed.

4. The objectives of economic agents

An economic agent is a decision maker in the economy: a consumer (household), a worker, a producer (firm) or the government. Maximisation means choosing the option that gives the greatest value of some chosen objective, such as utility, profit or output, subject to a constraint.

Agent	Possible objectives
Consumers	Maximise utility (satisfaction), subject to income.
Workers	Maximise wages, job security, satisfaction, or leisure time.
Firms	Maximise profit, revenue, sales volume, growth. Or aim at satisficing, survival or social goals.
Government	Growth, low unemployment, stable prices, fairer income, a healthy environment.

Worked example: a consumer maximising utility

A consumer has £12. Good X costs £3 and good Y costs £1. The marginal utility (MU) of each extra unit, in utils, is:

Unit	MU of X	MU of Y
1st	36	9
2nd	30	8
3rd	24	7
4th	18	6
5th	12	5
6th	6	4

The aim is the most total utility. Compare MU per £ (MU ÷ price): X gives 12, 10, 8, 6, 4, 2; Y gives 9, 8, 7, 6, 5, 4. Buy the highest first: X1 (12), X2 (10), Y1 (9), X3 (8), Y2 (8), Y3 (7). Spend: £9 on three X plus £3 on three Y = £12.

Total utility = (36 + 30 + 24) + (9 + 8 + 7) = 90 + 24 = 114 utils
Alternative: 2 X and 6 Y costs £6 + £6 = £12, giving 66 + 39 = 105 utils

The maximum is 114. At the optimum the last X gives 8 utils per £ and the next gives 6, while the last Y gives 7 and the next gives 6. Spending any £ elsewhere would lose utility.

Worked example: three firm objectives

A small firm (illustrative) faces price P = 100 − 10Q and total cost TC = 100 + 20Q.

Q	P (£)	TR	MR	TC	MC	Profit
1	90	90	90	120	20	−30
2	80	160	70	140	20	20
3	70	210	50	160	20	50
4	60	240	30	180	20	60
5	50	250	10	200	20	50
6	40	240	−10	220	20	20
7	30	210	−30	240	20	−30

• Profit maximisation: produce while MR is at least MC. At Q = 4, MR is 30, above MC 20. At Q = 5, MR is 10, below MC. Output is 4, price £60, profit £60.
• Revenue maximisation: produce while MR is positive. MR is 10 at Q = 5 and −10 at Q = 6, so output is 5, TR is £250 and profit falls to £50.
• Sales volume maximisation, with no loss: produce as much as possible while profit is not negative. Q = 6 gives £20 and Q = 7 gives −£30, so output is 6 at price £40.

The objective changes the output, the price and the profit.

Evaluating objectives

• Profit maximisation is a clear objective, but needs full information on costs and demand, and owners may not control managers.
• Revenue, volume and growth objectives suit managers who gain from size, or firms that want market share. They cost profit in the short run.
• Satisficing and social goals (a “good enough” profit, or ethical aims) reflect real behaviour, but are harder to predict.
• Consumers may not be rational. They may follow habit, or lack information.
• Government objectives can conflict. Faster growth may raise inflation or harm the environment. Fairer incomes may dull incentives to work. The weight given to each is a value judgement.
• A conclusion should say which objective is the most realistic for the agent in the context given.

Common errors

• Describing resource allocation as “spending money”. It is the sharing of scarce resources between uses.
• Giving an incentive but not saying how it changes behaviour, or what that does to allocation.
• Saying planned economies have no prices. They have prices, but planners set them.
• Calling a mixed economy a halfway point with no discussion of the proportions.
• Using total revenue where marginal revenue is needed to find the maximum.
• Listing advantages and disadvantages without a judgement.

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.