Have you ever found that you could not pull up a web page, and while troubleshooting the problem you found an unexpected IP address of 169.254.x.x? What did you later find out the trouble was? I will bet a dollar that for some reason, your computer could not find the DHCP server.
Windows and Apple computers (and some Linux flavors) have a default setting in the operating system that is based on international standards. When the interface is configured for DHCP but is unable to receive a response from a DHCP server, the OS automatically configures the interface with an address.
First of all, I assume you know what an IP address is. And you know what DHCP is? Let's keep this short and sweet and you can look up the details in Wikipedia later on if you need. An IP address is what ubniquely identifies your computer on the internet; without an IP address, you can be found. Imagine if your house did not have an address; how would you get any mail?
DHCP stands for Dynamic Host Configuration Protocol. You can either configure your network interface for DHCP or assign it a static address. If you assign static, that means you have to manually assign an address on every PC, one at a time. If you administer 100 PC's, that can get complex and time consuming. DHCP allows each PC to request an address from a server (as well as the Gateway and DNS addresses). This allows the administrator to set up one server, let the PC's configure themselves, and go home early.
However, cables break. Segments fail. Routers and servers fail. Stuff happens. If your PC is configured for DHCP, it sends out a request, and it never hears a reply, what can it do?
Well, it could just continually transmit requests; however, this consumes resources and becomes pointless after a few minutes. It could cause a hardware failure if this scenario was not planned for by the design engineers. It could disable the interface; however, when the DHCP server becomes available you are at a disadvantage--especially if you are a novice without support.
The solution is to allow APIPA to assign a private address to the network interface. This simply ends the DHCP request process and keeps the interface alive. Later, when the DHCP server is functional, the interface will automatically discover it at reconfigure itself. Windows will assign an APIPA address and attempt to discover the DHCP server every 3 minutes (5 minutes if the DHCP lease expired while connected) by default.
APIPA is an IANA (Internet Assigned Numbers Authority) standard, which means that it is applicable to the internet as a whole. The IANA has assigned the IP range of 126.96.36.199 through 169.254.255.255 as APIPA addresses only. These addresses are not routable and can be used by anyone without registering. However, without a functional DHCP server, you probably have bigger troubles on your hands than addressing.