Scarcity and Opportunity Cost: Question 5
Syllabus 1.1, 1.3
Greenfield Community Farm has a fixed area of land, a small team of workers and one tractor. Because these resources are limited, the farm's managers must make several decisions each season:
Decision 1: whether to use this season's land to grow vegetables or to keep dairy cattle.
Decision 2: whether to plough the fields using the farm's workers by hand or using the tractor.
Decision 3: whether to sell what is produced to local families in the nearby village or to a supermarket chain in the city.
(a) Explain why Greenfield Community Farm must still make these three decisions each season, even though it already owns land, workers and a tractor. [2]
(b) For Decision 1 and Decision 3, identify which of the three basic economic questions (what to produce, how to produce it, for whom to produce it) each one represents. [2]
(c) Suppose Greenfield Community Farm decides to grow vegetables rather than keep dairy cattle this season. Explain the opportunity cost of this decision. [2]
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Worked solution
Part (a): Why the farm must keep choosing
Greenfield Community Farm’s resources are not unlimited: it has a fixed area of land, a small, fixed team of workers and only one tractor. Because these resources are finite, the farm cannot use the same land for vegetables and cattle at once, cannot plough by hand and by tractor with the same workers at the same time, and cannot supply every possible customer with everything it produces. Owning some resources does not remove the economic problem; it simply sets the limit within which the farm must keep choosing how to use those resources each season.
Part (b): Matching decisions to the three basic economic questions
- Decision 1 (vegetables or dairy cattle) asks what to produce, which good the farm’s land should be used for.
- Decision 3 (selling to local families or a supermarket chain) asks for whom to produce it, which group of customers ultimately receives the farm’s output.
(Decision 2, ploughing by hand or by tractor, is a separate example of how to produce it. The farm’s choice of production method rather than of product or customer.)
Part (c): The opportunity cost of choosing vegetables
The farm’s land this season is a fixed, limited resource: once it is planted with vegetables, it cannot also be used to keep dairy cattle. By choosing to grow vegetables, Greenfield Community Farm gives up the dairy cattle it could otherwise have kept on the same land this season. This forgone alternative (the dairy cattle, not the vegetables that are actually produced) is the opportunity cost of the decision, and it arises precisely because the same fixed area of land cannot support both uses at once.
Final answers
- (a) The farm’s land, workers and tractor are finite, so it must keep choosing between alternative uses of these scarce resources each season, even though it already owns them.
- (b) Decision 1 = what to produce; Decision 3 = for whom to produce it.
- (c) The opportunity cost is the dairy cattle the farm gives up keeping, because the same land cannot be used for vegetables and cattle at the same time.