An Upgrade Package in Joomla! is an archive of files that contain the files that have changed between Joomla! versions. When this archive is unpacked, it replaces the old version of the modified files with the new version. For example, if 50 files were changed between version 1.x.1 and 1.x.2, the upgrade package from 1.x.1 to 1.x.2 would contain these 50 files and, when unpacked, would replace these 50 files and upgrade the installed version from 1.x.1 to 1.x.2.
Upgrade Packages are also sometimes referred to as patch files. Before installing an Upgrade Package, read the release notes and the Upgrade Instructions relating to the Upgrade Package.