displacement adds geometry and physically moves the surface of the object being shaded where as bump only changes the colours of the surface to simulate that effect.

Best way to demonstrate is to create a sphere and apply a simple bump to it and then render and look at it's profile. You should see the sphere as normal. If you then take the same sphere and apply a displacement to it you should see the profile of the sphere being "displaced" by the effect. Bumps are quicker and generally less render time expensive however for close up stuff displacement is better (Although displacement and raytracing are not the best of friends!!! for obvious reasons!)

Hope that helps

Alan