A Technical Note on New Applications of Lorenz Curves in Business Based on Pareto Principles

Abstract

In this paper, the authors proposed new applications of Lorenz curves. Specifically, the authors demonstrated how Lorenz curve can be applied to display heterogeneities in values of some economic commodities. The economic commodities studied here includes: (1) classes of items of inventory, something which is a very important issue of management accounting. This problem is based on the pareto principle also known as ABC technique of inventory control. The corresponding Lorenz curve for inventory values of different classes of items would guide management on which class of inventory to be accorded more control mechanisms. (2) Customers, who from management accounting and finance perspectives, are viewed as assets of the firm. However, just like any other asset, customers have different values to the firm and therefore, some classes of customers are more important to the firm than others, this is based on a well-known principle of 80/20 percent rule in marketing and it is similar to the pareto principles. This situation was illustrated using Lorenz to help management identify the class of customers who are very important to the firm and design appropriate measures of retaining these customers. The paper provided illustrative numerical examples to guide readers. To the best of our knowledge, this is the first paper to apply Lorenz curves to examine these kinds of distribution problems.