A plugin is a kind of Joomla! extension. Plugins provide functions which are associated with trigger events. Joomla provides a set of core plugin events, but any extension can fire (custom) events. When a particular event occurs, all plugin functions of the type associated with the event are executed in sequence. This is a powerful way of extending the functionality of the Joomla! Platform. It also offers extension developers a way to allow other extensions to respond to their actions, making extensions extensible.

The Joomla! plugin architecture follows the Observer design pattern. The JPlugin class provides the means to register custom plugin code with core or custom events. The JDispatcher class (JEventDispatcher in Joomla 3.x) is an event handler which calls all plugins registered for a particular event, when that event is triggered.

Reference: http://docs.joomla.org/Glossary