Cache memory is a small, fast memory located between the CPU and main memory that stores copies of frequently used instructions and data. It accelerates computer speed while keeping costs low. When the CPU requests data, the cache is checked first for a cache hit before accessing the slower main memory. If the data is not found in cache, a cache miss occurs and the data must be retrieved from main memory, which is slower. Replacement algorithms like LRU determine which cached data to replace when new data must be added to a full cache.