Final answer:
Businesses' ability to transfer rising input costs to consumers or retain benefits from reduced costs depends on the price elasticity of demand, market competition, and other factors.
Step-by-step explanation:
Whether businesses can pass costs on to consumers is a question closely linked to the concept of price elasticity of demand. When the price of a key input rises, a firm must decide if it can transfer those higher costs to the consumer without negatively impacting demand. If a business operates in a market with highly elastic demand, consumers are more responsive to price changes and are likely to reduce their purchases if prices rise. Conversely, if the demand is inelastic, the business might be able to increase prices without losing too many sales. The same principle applies when production costs decrease due to innovation or other savings. In this case, the market may compel the firm to lower its prices to remain competitive, although the choice depends on the overall competitive strategy and the firm's goals.
Ultimately, the ability of a firm to transfer costs to consumers or retain benefits from reduced production costs on several factors, including the market structure, the level of competition, the product's necessity, and the availability of substitutes.