Level 1 data shows the best bid and ask and the last trade. Level 2 shows depth: several price levels on each side of the order-book and, on some venues, which market-maker or exchange is quoting.
Traders use it to gauge short-term supply and demand and to place limit orders where size is resting. It is most useful in fast, liquid names and least useful in thin ones, where the displayed size can vanish instantly.
Example: Level 2 shows 15,000 shares bid at $32.50 across four venues while the ask side is thin. That does not mean price must rise, but it tells you sellers will need to absorb that size to push through.
Related: order-book, time-and-sales, market-maker, liquidity