MC maintains a large databsae of all your media collection wherever it is located.AFAIK this is where the Windows analogy of "Library" ends i.e both maintaining a collection of links to the media location.
MC then analyzes this library database according to any tags in the files and according to the file's folder/filename structure within windows.
With this info MC can then filter the media database into selections called "Libraries". These selections are based on instructions you give it to display, search and organize your media to suit a particular collective purpose.
The commonest view would be arranging all you artists grouped by album, similar to a physical CD collection you have on the shelf but the the flexibility of having a database with filtering and search capacity now starts to become mind boggling.
To paraphrase the wiki, You can create custom library views to filter selected content to suit a particular purpose.
• You can create a library for each member of the house. Members import only those files they like. They can also rate their music in their own way. You may want to disable tag updating in this scenario.
• You can create a library for Party Music. When your friends come over, they see the music they are supposed to see (and your collection of Engelbert Humperdinck albums remains your secret!). See Party Mode and Access Control for a different way of doing this.
• On a laptop that you use both at home and on the go, you could have two libraries: one for home use accessing a network drive containing the losslessly compressed content, and one containing smaller (lossy compressed) content for travel.
• You might want to keep your audio, images, and video separated from each other so you could create a separate library for each.
• You might want to keep your French music separate from your English music. Create one library for each.
Playlists on the other hand are just lists of tracks which you play in sequence or random shuffle.Conceptually, granted there are similarities eg like a "party playlist", tracks you have selected for parties, or a Library of party songs, but the big differences are in the power and flexibility to search, organize and display your media.
At the risk of confusing things there are also "smartlists" aka "dynamic playlists" which are basically track lists ( a selection of the database) chosen by a set of rules.
When you look into how MC Libraries are so powerful you will start to understand when you see they are created using basically six "categories" you can combine and mix in different ways for viewing, searching and organizing your media..
These categories are:
• Category based on any of MC Fields like [genre],[artist] etc. ( the most common)
• Category based on a File path
• Category based on a Playlist group
• Category based on an Expression
• Category based on a Search List,
• A "Special" category.
Categories are arranged sequentially, either horizontally in line, or vertically like a folder structure, to multiply their filtering power. This 'chain linking' effect means the first category having a knock-on effect to the next in line eg. sorting Artist and then Album ( [Artist]/[Album] ). They can be grouped within the same type of category like Fields eg [Artist]/[Album] or mixing categories like Library [Field] /Expression.
I could go on but hopefully you get the picture.
(others will correct any technical errors
)
Its a world of fun but there is a learning curve, so suggest be patient.