A Drupal distribution is a combination of Drupal core, some contrib modules and themes, plus default configuration that can be installed as a whole.
Most distributions target a specific use case, like building restaurant websites. So, immediately after installing the Restaurant distribution, you have a site with a menu, online reservations, and a map out-of-the-box—without having to start from vanilla Drupal 7 and build all those things from scratch. There are Drupal distributions for many use cases: company intranets, university department sites, church websites, sales demos, and much more!
Panopoly is a very special Drupal distribution, in that it can be used as a "base distribution" that others can use to build their own distributions, while taking advantage of our work and focusing only on the unique value proposition of their new distribution.
Panopoly’s goal is to pull in the best of Drupal contrib and combine it with best practices to give site builders a solid base to start from. There's a strong focus on WYSIWYG, editing content in place, and improving the user experience.