Wool is commonly used as a building block in Minecraft, since it's easy to farm and there are a lot of color options to choose from.
There are a couple ways how you can farm wool in Minecraft:
1) Just collect them in a hole or fenced out area. Then breed and shear them whenever necessary.
2) Use a simple automatic farm to get wool. This system uses an observer to detect when the grass has been eaten, then harvests the wool by using the shears in the dispenser. Just make sure to build it into the ground, otherwise grass won't grow back.
3) Use the most advanced and compact wool farm. This is the best option for farming huge amounts of wool, since it's easily expandable. On the picture you can see a 16 sheep module, producing over 800 wool per hour.
It's not the cheapest resource-wise, but it's the most efficient design, and we even did a tutorial video on how to build it.
If you have not yet seen the tutorial video: Minecraft Efficient Wool Farm Making 800 Wool Per Hour
or
Download the Sheep Farm here: WORLD DOWNLOAD