Watch the Using a Capo online guitar lesson by Vicki Genfan from Acoustic Rhythm Survival Guide
There are a couple of reasons you might use a capo; First of all, you might want to play a song with certain chords and voicings, but the key is too high or low for your singing voice. The capo lets you play the same chords, but in a new key.
For the exercises I'm showing you here, I'm using the capo on the 2nd fret which puts everything a whole step higher... so when I'm saying I'm playing a "G" chord, I'm actually playing an "A" chord.
Make sense? Be careful about this if you're playing with other musicians! It's good to always know what 'actual' key you're in and what the names of the chords are with your capo on when communicating with other musicians.
Another reason you might use a capo is if you're working on an exercise, or particular chord changes that may be difficult for you, using the capo will give you access to the higher frets on the guitar, which are actually closer together, hence, it's a bit easier to finger chords. You can then work your way towards building the strength and dexterity you need to play without the capo.
And lastly, there are times when I use a capo on an instrumental song, just because I like the sound of a higher key.