Encapsulation is the process of inserting one piece of data inside another piece of data by adding addressing and labling information to the front of the existing information.
To use an analogy from medicine, we use the example of medicine that is packaged in a gelatin capsule. The capsule contains a powdered substance that was placed inside the capsule so it could be delivered to your stomach in a neat, tidy package.
Computers that communicate over networks use encapsulation for much the same reason. They need to send data to another process or computer, so they break the data into pieces, encapsulate the data with information from a protocol on a lower layer of the OSI model and then transmit the entire capsule to the network. The capsule that surrounds the data is now called a datagram and usually has address information, such as an IP address, allowing the data to be sent to the correct computer.