Pareto Principle

AAA

DEFINITION of 'Pareto Principle'

A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes. Also referred to as the "Pareto rule" or the "80/20 rule".

INVESTOPEDIA EXPLAINS 'Pareto Principle'

This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. For instance, the efforts of 20% of a corporation's staff could drive 80% of the firm's profits. In terms of personal time management, 80% of your work-related output could come from only 20% of your time at work.

The Pareto Principle can be applied in a wide range of areas such as manufacturing, management and human resources. In Pareto's case, he used the rule to explain how 80% of property in Italy was owned by 20% of the country's population.

VIDEO

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Pareto Analysis

    A technique used for decision making based on the Pareto Principle, ...
  3. Dismal Science

    A term coined by Scottish writer, essayist and historian Thomas ...
  4. Economies of Scope

    An economic theory stating that the average total cost of production ...
  5. Moore's Law

    An observation made by Intel co-founder Gordon Moore in 1965. ...
  6. Productivity

    An economic measure of output per unit of input. Inputs include ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Investing Basics

    Black Swan Events And Investment

    These world-changing events are rare and difficult to predict, but they have serious implications for your investments.
  3. Economics

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  4. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Economics

    What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become too large.
  6. Economics

    What is backward integration and how does it relate to economies of scale?

    See how a firm can realize greater economies of scale by engaging in backward integration mergers with one or more of its suppliers.
  7. Investing Basics

    Why do companies decide to unbundle their lines of business?

    In recent years, companies have discovered that there are limits to the gains created by having all major business activities in one organization.
  8. Investing

    How do name-brand products compete with their generic competitors?

    On April 2, 1993, Phillip Morris announced that it was cutting the price of its cigarettes to compete with the growing number of generic brands selling for much less. The announcement had an ...
  9. Economics

    The Nash Equilibrium

    Nash Equilibrium is a key concept of game theory, which helps explain how people and groups approach complex decisions. Named after renowned mathematician John Nash, the idea of Nash Equilibrium ...
  10. Investing Basics

    The Basics Of A Financial Analysis Report

    Running financial analysis on a company or industry is a key skill every investor must learn and understand how to undertake without which an ineffective financial report and investment recommendation ...

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center