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What are the effects on UK businesses after an increase in fuel prices?

Due to the UK economy being heavily dependent on fuel, it is inevitable that an increase in fuel prices will affect almost every UK business. However these affects can vary from sector to sector.

Firstly, fuel prices have a direct effect on transport costs and thus their distribution costs, these drive up production costs and hence lower profits. Transport firms are likely to suffer the most however, as rising fuel prices mean ticketing costs increase which affects them more due to the nature of the industry (being heavily fuel dependent).

If the price rise persists in the long run, this may lead to lower demand for cars but a higher demand for bicycles as economic agents adapt to the changing environment. This may also lead to many people to go on holiday nearer from home and shop nearby, which in turn could help the national tourism industry and local corner shops. 

It has to be suggested however that demand for fuel is likely to be inelastic and so an increase in the cost of production will only have a small impact on reducing demand as firms can easily pass on most of these costs to the consumer, and thus maintain most of their profits. Therefore the impact on businesses could be limited.

Firms can also adapt by being more fuel efficient in the long run, this reduces their dependency on fuel and thus a future price rise may not affect them as much as before. 

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