The Lorenz Curve
Expert reviewed • 22 November 2024 • 3 minute read
What is the Purpose of Using the Lorenz Curve?
The Lorenz Curve is a graphical representation used in economics to depict the distribution of income or wealth within a population. It provides a visual way to understand inequality and is often used in conjunction with the Gini Coefficient to quantify this inequality. The Lorenz Curve shows the proportion of total income or wealth earned by cumulative percentages of the population, starting with the poorest and ending with the richest. The following graph demonstrates a standard Lorenz Curve.
Key Components of the Graph
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Gini Coefficient: As displayed by the graph, there are defined areas (Area: and ). These areas are used to calculate the Gini Coefficient, which is another measure of inequality. The formula for the Gini Coefficient is:
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By comparing the Lorenz Curve to the line of perfect equality, economists can visually assess the level of inequality in an economy. The further the Lorenz Curve is from the line of perfect equality, the greater the level of inequality.