One of the functions of the price system is that it

Step 1: Analyze the question The question asks for a function of the price system. In Economics, the price system (or price mechanism) is the way prices, driven by demand and supply, coordinate economic activity in a market economy.

Step 2: Explain the concept The price system performs these main functions:

• Rationing: It allocates scarce goods to those willing and able to pay.
• Signalling: Rising prices tell producers to supply more, and falling prices tell them to supply less.
• Allocating resources: It directs factors of production to where they are most needed.
• Regulating production and consumption: Prices guide what is produced, how much is produced, and who consumes it.

Step 3: Evaluate each option

• A. Encourages high volume of production: Not always true. High prices can encourage more production, but low prices discourage it. It is not a general function.
• B. Dictates what citizens will consume: Wrong. Consumers choose freely (consumer sovereignty). Prices influence choices but do not dictate them.
• C. Discourages consumption of harmful goods: This only happens when the government intervenes, for example through taxes on cigarettes. It is not a general function of the price system.
• D. Regulates production and consumption: Correct. When demand rises, prices rise, so producers supply more and consumers buy less. When demand falls, the reverse happens. This is how the price system balances production and consumption.

Step 4: Answer

Exam tip: For "functions of the price system", remember R-A-S: Rationing, Allocation of resources, Signalling. Any option that talks about regulating or allocating production and consumption is usually the right one. Be wary of options with strong words like "dictates", which usually mean the option is wrong.