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Or on a more abstract level to compare to Huffman encoding: Huffman turns each symbol into a series of bits like "011". Arithmetic encoding lets you use fractional bits.

A Huffman tree for digits might assign 0-5 to 3 bits and 6-9 to 4 bits. Encoding three digits will use on average slightly more than 10 bits. Using AC will let you give the same amount of space to each possibility, so that encoding three digits always uses less than 10 bits.

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