Classes define new user-defined data types that contain data members and member functions. Classes act as blueprints for objects which represent real-world entities. There are two types of classes: global classes which can be called outside functions, and local classes which are called within functions. Objects are variables of a class data type that represent runtime instances of that class. An object's state is represented by its data members, and its behavior is represented by member functions. Classes allow for code reusability and data abstraction.