General
In simplest terms, cache memory is a special type of super-fast memory built onto or next to the processor. Your processor moves and works with a lot of data. Sometimes your processor works on a problem, then needs to set it aside and work on another before picking up the original problem. Without cache, your processor would have to store the set-aside data in conventional memory (RAM). While there is no particular reason your processor cannot do this, setting data aside in conventional memory subjects the data movement to the limitations of your motherboard and how fast it can move memory — nowhere near as fast as your processor. Designers figured out that there had to be a much faster and more efficient way for this to happen. Enter cache memory.
Types
L1 Cache
L1 cache is also known as onboard or primary cache and is built into the CPU itself. L1 cache is typically very small in size (for most computers it is 16KB, although this is changing rapidly), but it is very fast.
L2 Cache
L2 cache is also known as external or secondary cache. It is built into a separate chip, but it is still much faster than conventional memory because it, too, is not subject to the speed limitations of the motherboard. Typical ranges for L2 cache are 128KB – 1MB.
Importance
Depending on what you do, the amount of cache your system has can greatly increase or decrease the overall speed of the system. For example, a 450MHz Pentium III has far more cache than a 450MHz Celeron. Even though both chips have the same clock speed, they do not perform at the same level in all situations. For data-intensive applications like complex spreadsheets or graphic design, the Pentium III will beat out the Celeron any day. The lesson here is to know what you will be doing with your computer before you settle on a processor. If you are into CAD design and buy a Celeron, you may be sorely disappointed. If, on the other hand, you just write letters and surf the Internet, you may not want to spend the extra money on the Pentium III.