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We develop a two stageconsumper optimization problem to derive a system of household demand for natural gas, electiricity, and other energy sources. A housedhold first allocated its resources between the energy sources and non-energy consumer goods and services, and then optimizes its uses of various energy sources.we use a locally flexible function and the Almost Ideal Demand System to estimate the data are from the household Budget Survey for two major Iranian cities, Tehran and Isfahan, for the period 1375-1380(1996-2001.) The results indicate that both natural gas and electricity are price inelastic. The income elasticites also show that natural gas and electricity are necessary goods.
JEL CLASSIFICATION: C33, C51, D12.