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Microdata is a way of adding contextual information to your website and its contents, allowing search engines to better understand the information you provide them with.
Contextual information allows search engines to understand the meaning of the information presented on your website, which allows it to better answer more verbose 'natural language' queries where an understanding of the meaning helps to interpret the most relevant content to be displayed.
Microdata can be used to explain just about anything you would ever want to explain, and there are more 'schemas' being added on a regular basis. There are several vocabularies in existence, however at present the system favoured by search engines is that of schema.org.
Microdata can be added to Joomla! using template overrides or with the use of plugins which allow you to insert microdata into specific resources.
As of Joomla! 3.2 there is a library within Joomla! which allows developers to pull in microdata without needing to format it correctly. The following resources are available by the author of the microdata library introducing the library and how to use it: