Difference Between a Microprocessor and a Microcontroller?

A microcontroller is itself a type of microprocessor. Both devices are similar in that they execute software instructions and so sometimes it's hard to make a distinction between the two. But generally a microcontroller is optimized to be embedded into specific applications and to be low-cost. They usually operate from software (firmware) stored onboard in non-volatile memory, perform a more specific range of functions and to need few external support components. Often their I/O is made to better interface with non-IC devices.

For example, a toy company wants to make a toy fire engine with flashing lights. It would be silly for the company to use a desktop PC's microprocessor, a hard drive, etc. just for this. It is much better to use a microcontroller which has only enough memory for the flashing light program and just enough I/O for the lights and a pushbutton or two.