Abstract
The purpose of this paper is to provide an introduction to AIDS-based demand systems (i.e., those based on Deaton and Muellbauer's Almost Ideal Demand System). We discuss derivation of the AIDS model from its microeconomic foundations, clearly state the assumptions underlying AIDS, and provide a primer on how to implement the model in practice. We use a high level of detail to show every step of the AIDS process. We detail the algebra because the original articles by either Deaton and Muellbauer (in 1980) or Hausman et al. (in various papers over several years) skip most of the steps. We discuss using the AIDS model by itself and in two variations of Hausman et al.’s multilevel systems. We briefly discuss some pitfalls common to all demand systems. Finally, at the end of this document, we provide an example of how the elasticities may be used to predict post-merger price changes via a linear approximation to the Bertrand model.
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