Caching is the use of a faster data store to improve response time, by reducing the amount of processing.
Using a fast temporary data store of previous requests, performance can be inproved. There are many technologies and techniques available to achieve better performance.
Improving results is the first tier of performance gains can be achieved relatively easily, however caching is a complex subject requiring great skill and knowledge to achieve the best results.
Refer to Drupal caching, speed and performance for implementation information.