When I was a teenager, I went to a private high school located along Lake Erie in the northwest corner of the commonwealth of Pennsylvania. To help pay for my tuition, I worked part time on a farm.
I remember that every spring, the manager of the farm, whom I will call Farmer Jones, struggled with the same problem. He had five hundred acres of good planting land, a large herd of milking cows, some marginal acreage to pasture his cows, and some hogs.
The soil was a sandy loam, and it had a lot of small rocks in it. He used to say that given the climate and the sandy loam soil of the area, he could grow only potatoes and feed-corn. Potatoes were his cash crop. Corn was his winter feed for his livestock.
Farmer Jones was very aware that every acre planted in corn could not be planted in potatoes. He knew that his planting acreage was a scarce resource. He also knew that his opportunity cost for planting potatoes was less corn and that for planting corn was fewer potatoes.
I can assure you that Farmer Jones did not drive around the county telling people that he had just planted five hundred acres of corn and, because we live in a world of scarce resources, his decision had created an opportunity cost equal to the five hundred acres of potatoes that would not be grown on this land. He internalized this cost into the operation of his farm in the following manner.
He would sit down at his desk in front of his hand-operated "adding machine" and do what he called some planning (simulations). He would forecast a series of prices for a bushel of potatoes, his cash crop, and for a bushel of corn, his feed corn. He would then estimate how much cash he would give up if he planted more feedcorn. He would also estimate how much more his feedcorn would cost him if he planted more potatoes because he would have to buy some of it from other farmers or feed companies.
What he was calculating was the opportunity cost associated with planting more corn than potatoes and that for planting more potatoes than corn. He wasn't aware of it, but his whole planting operation was driven by his opportunity cost.
I'll bet a dollar against a dime that if Farmer Jones were alive today, he would do the same kind of analysis. The only difference might be that he would do his planning (simulations) on a computer instead of on an "adding machine."
I remember that every spring, the manager of the farm, whom I will call Farmer Jones, struggled with the same problem. He had five hundred acres of good planting land, a large herd of milking cows, some marginal acreage to pasture his cows, and some hogs.
The soil was a sandy loam, and it had a lot of small rocks in it. He used to say that given the climate and the sandy loam soil of the area, he could grow only potatoes and feed-corn. Potatoes were his cash crop. Corn was his winter feed for his livestock.
Farmer Jones was very aware that every acre planted in corn could not be planted in potatoes. He knew that his planting acreage was a scarce resource. He also knew that his opportunity cost for planting potatoes was less corn and that for planting corn was fewer potatoes.
I can assure you that Farmer Jones did not drive around the county telling people that he had just planted five hundred acres of corn and, because we live in a world of scarce resources, his decision had created an opportunity cost equal to the five hundred acres of potatoes that would not be grown on this land. He internalized this cost into the operation of his farm in the following manner.
He would sit down at his desk in front of his hand-operated "adding machine" and do what he called some planning (simulations). He would forecast a series of prices for a bushel of potatoes, his cash crop, and for a bushel of corn, his feed corn. He would then estimate how much cash he would give up if he planted more feedcorn. He would also estimate how much more his feedcorn would cost him if he planted more potatoes because he would have to buy some of it from other farmers or feed companies.
What he was calculating was the opportunity cost associated with planting more corn than potatoes and that for planting more potatoes than corn. He wasn't aware of it, but his whole planting operation was driven by his opportunity cost.
I'll bet a dollar against a dime that if Farmer Jones were alive today, he would do the same kind of analysis. The only difference might be that he would do his planning (simulations) on a computer instead of on an "adding machine."
No comments:
Post a Comment