What objectives do firms pursue beyond profit maximisation, and why might managers and owners disagree?
1.4 Business objectives: profit maximisation, revenue and sales maximisation, growth, satisficing and corporate social responsibility, and the principal-agent problem from the divorce of ownership and control.
An OCR H460 answer to business objectives, covering profit maximisation at MC equals MR, revenue and sales maximisation, growth, satisficing and corporate social responsibility, and the principal-agent problem that arises from the divorce of ownership and control.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
OCR wants you to explain the profit-maximising rule, to describe the main alternative business objectives (revenue and sales maximisation, growth, satisficing and corporate social responsibility), and to explain the principal-agent problem that arises when ownership and control are separated.
Profit maximisation
Profit is the reward to enterprise and the signal that draws resources into a market. Standard microeconomic theory assumes firms maximise it, which gives the rule used to analyse every market structure.
Alternative objectives
- Revenue maximisation. Maximising total revenue, which occurs where marginal revenue is zero (). Managers paid by turnover, or firms seeking to dominate a market, may target revenue rather than profit.
- Sales (volume) maximisation. Selling the largest quantity consistent with at least normal profit, to build market share or deter entry.
- Growth. Expanding the size of the firm to gain economies of scale, market power, or managerial prestige and security. Growth can be organic or through mergers.
- Satisficing. Herbert Simon's idea that, given limited information and competing stakeholder demands, managers aim for a satisfactory rather than a maximum outcome, doing enough to keep shareholders, workers and customers content.
- Corporate social responsibility (CSR). Pursuing social and environmental goals (fair pay, sustainability) alongside or instead of pure profit, which may also build long-term brand value.
The principal-agent problem
The problem explains why real firms often pursue revenue, sales or growth rather than strict profit maximisation, and why owners use devices such as performance-related pay, share options and monitoring to align managers' incentives with their own.
Examples in context
- Tech firms chasing growth. Many technology companies prioritised user growth and market share over short-run profit, accepting losses to dominate a market before raising prices.
- Executive pay and share options. Firms grant managers shares precisely to tie their reward to the share price, narrowing the principal-agent gap.
- CSR and brand value. Retailers promoting fair pay and sustainable sourcing pursue CSR objectives that can also raise long-run profit through reputation.
Try this
Q1. State the output rule for profit maximisation and explain it. [3 marks]
- Cue. ; if produce more, if produce less, so profit peaks where they are equal.
Q2. Explain how the principal-agent problem can lead a firm away from profit maximisation. [4 marks]
- Cue. Managers (agents) have more information and different goals from owners (principals), so they may pursue salary, perks or growth.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H460/01 20204 marksA firm's marginal revenue is and its marginal cost is constant at , where is in thousands of units. Calculate the profit-maximising output.Show worked answer →
A short calculate question. A profit-maximising firm produces where marginal cost equals marginal revenue ().
Set . Then , so (thousand units). At this output the last unit adds exactly as much to revenue as to cost, so profit cannot be increased by changing output.
Markers reward the rule, the correct solving for , and the answer with units. A common slip is to maximise revenue instead (where ), which gives and is a different objective.
OCR H460/01 202210 marksDiscuss whether firms always aim to maximise profits.Show worked answer →
A levels-of-response question. Knowledge and application: state the profit-maximising rule () and explain why firms might pursue it (to reward owners, fund investment, satisfy shareholders).
Analysis: explain alternative objectives. Sales or revenue maximisation (managers paid by turnover or seeking market share), growth (to gain economies of scale or managerial power), satisficing (Simon: meeting rather than maximising targets given the divorce of ownership and control), and corporate social responsibility.
Evaluation: the principal-agent problem means managers (agents) may pursue their own goals over owners' (principals') profit, and information is imperfect. But in the long run competition and shareholder pressure push firms toward profit. Conclude with a supported judgement: not always, but profit is a powerful long-run constraint.
Related dot points
- 1.4 Costs, revenues and profit: fixed and variable costs, marginal, average and total cost, the law of diminishing returns, economies and diseconomies of scale, total, average and marginal revenue, and normal and supernormal profit.
An OCR H460 answer to costs, revenues and profit, covering fixed and variable costs, marginal, average and total cost, the law of diminishing returns, internal and external economies and diseconomies of scale, the revenue concepts, and normal versus supernormal profit.
- 1.4 Market structures: the spectrum of competition, the characteristics and outcomes of perfect competition, barriers to entry and exit, and the theory of contestable markets.
An OCR H460 answer to market structures, covering the spectrum from perfect competition to monopoly, the assumptions and short-run and long-run outcomes of perfect competition, barriers to entry and exit, and the theory of contestable markets.
- 1.4 Imperfect competition: monopolistic competition, oligopoly and interdependence, monopoly and price discrimination, and the costs and benefits of monopoly power.
An OCR H460 answer to imperfect competition, covering monopolistic competition, oligopoly and interdependence (collusion, price wars and non-price competition), monopoly and price discrimination, and the costs and benefits of monopoly power.
- 1.4 The labour market: the demand for and supply of labour, wage determination in competitive labour markets, monopsony, trade unions, and the effect of a national minimum wage.
An OCR H460 answer to the labour market, covering the derived demand for and supply of labour, wage determination in a competitive labour market, monopsony employers, trade unions and collective bargaining, and the employment effects of a national minimum wage.
Sources & how we know this
- OCR A Level Economics (H460) Specification — OCR (2023)