Lorenz curve

Lorenz curve is a graph used in economics to show inequality in income spread or wealth. It is a graphical representation of the distribution of income or wealth. It is a way of  showing the distribution of income or wealth within an economy. This concept was developed by American economist Max O. Lorenz in 1905 for representing wealth distribution. It shows the cumulative share of income from different sections of the population. If there was perfect equality-assume that if everyone had the same salary -the poorest 20% would gain 20% of the total income and the poorest 80% of the population would get 80% of the total income. 

Explanation of this diagram:

The Lorenz curve is accompanied by a straight diagonal line with a slope of 1, which represents perfect equality in income or wealth distribution, this curve lies beneath it, showing the observed or estimated distribution. The area between the straight line and the curved line  expressed as  a ratio of the the area under the straight line is the Gini coefficient, a scalar measurement of inequality. The curve is a graph showing the proportion of overall income or wealth assumed by the bottom x% of the people. It is used to represent income distribution where it shows for the bottom x% of households , what % i.e, y % of the total income they have. The % of households is plotted on the x-axis and the percentage of income on the y-axis. Suppose the poorest 90% of the households have 55% of the total income. It means that the richest 10 % of income earners gain 45% of total income. The Lorenz curve can also shift if there has been a reduction in inequality, this curve has moved closer to the line of equality. Concept of Gini coefficient that is a scaler measurement of inequality is used  to express the extent of inequality in a single figure. It can range from 0 or 0% to 1 or 100%. If there is complete equality means that every individual has the exact  same income or wealth , it corresponds to a coefficient of 0. When we plot in Lorenz curve, complete equality would be a straight line diagonal line with a slope of 1 ( the area between this curve and itself is 0 and the Gini coefficient is 0). A coefficient of 1 means that one person holds all the wealth or all of the income. If coefficient is higher than 1 , then the Lorenz curve would dip below the horizontal axis.

Why to understand this Lorenz curve?

This concept is related with economics inequality. Lorenz curve is used to represent inequality of  income or wealth. Lorenz curve is used in representing economic inequality. It can be used to  represent inequalities in the distribution in any process or system. The level of  unequal distribution increases when the Lorenz curve drifts away from the baseline.