Pareto distribution

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Pareto distribution

the tendency for a small proportion of the number of objects or items being considered to account for a large proportion of the feature under examination. More crudely, the Pareto ‘law’ suggests that 20% of items account for 80% of the total amount of stock or sales or whatever. In the case of stock, the Pareto law implies that a small proportion of the total number of items stocked accounts for a large proportion of the total value of stock held.

The business significance of the Pareto distribution is that if management devotes the greater part of its time to controlling the most important 20% of the stock items held, it is, in effect, controlling a large proportion of the total value of the firm's stocks. See ABC ANALYSIS.

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