It is directly used to determine plasticity. How far a saturated fully worked wetted soil ribbon, can be stretched before the ribbon breaks. The distance it stretches is refered to as its plasticity. Kind of like stretching a plastic bag and seeing how far the molecules slide past each other until they eventually break apart.
Actually, the plasticity limit is a measure of the minimum amount of water required to get a fine grained material (it only applies to fined grained soils) into a plastic state, as defined by the test parameters. It really doesn't have a direct relationship to the length of a soil ribbon, as that would correspond with the stength of the material composition at the plastic moisture content.
The liquid limit is the minimum moisture content required to get a specific material into a liquid state, or capable of flowing.
The PI is the measure of the moisture content difference between the PL and LL. Generally, the PI and LL are used to classify soils in USCS, as clay or silt, and high plasticity or low plasticity. One example of why these classifications are relevant, the higher the plasticity of a clay or silt generally the more expansive the material tends to be, and the greater the shrink swell capacity. Also, higher plasticity soils have a higher moisture retention, and tend to have lower permeabilities.
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