# Pareto's law

## Pareto's law

[pə′rēd·ōz ‚lȯ]
(industrial engineering)
The principle that in most activities a small fraction (around 20%) of the total activity accounts for a large fraction (around 80%) of the result. Also known as rule of 80-20.

## Pareto's law

A law (sometimes called the 20–80 rule) describing the frequency distribution of an empirical relationship fitting the skewed concentration of the variate-values pattern. The phenomenon wherein a small percentage of a population accounts for a large percentage of a particular characteristic of that population is an example of Pareto's law. When the data are plotted graphically, the result is called a maldistribution curve. To take a specific case, an analysis of a manufacturer's inventory might reveal that less than 15% of the component part items account for over 90% of the total annual usage value.

The mathematics required to calculate and graph the curve of Pareto's law is simple arithmetic. It should be noted, however, that the calculations need not be done in all cases. It may suffice to merely make a rough approximation of a situation in order to determine whether or not Pareto's law is present and whether benefits may subsequently accrue.

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The first observed phenomenon involving heterogeneity was the distribution of income, from which derived the so-called Pareto's law or Pareto's curve.
The Italian economist Vilfredo Pareto derived what has become known as Pareto's law from his studies of income distribution in a number of countries at the turn of the 20th century.
Professor Walker said this had resulted in many firms moving out of the trap of Pareto's Law - where 80 per of income comes from 20 per cent of customers.
Experience indicates that Pareto's Law (20 percent of the items will control 80 percent of the budget) applies to construction programs.
However, you can use Pareto's Law to derive the levels of stock that should be on hand.
When comparing a firm's sales volume generated by its largest customers, Pareto's law is supported by CRF's Benchmarking Survey.
Managers are aware of Pareto's Law, better known as the "80-20" rule.
While the critical analysis in Pigou's chapter is flawed in a very fundamental manner, his rationale for critieising Pareto's law still serves to underscore his motivation for studying welfare economics.
The strategies described are based on Pareto's Law, which, when applied to the distribution of SKUs, says that 20% of the items will account for 80% of the activity.
In my data-handling course, I discuss Pareto's Laws of Maldistribution.

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