The term ‘action’ refers to the height of the strings above the fretboard. It is the way a guitar is adjusted and how well it plays, relative to the style of music that is being played. The action on an instrument played by an aggressive strummer or flatpicker will vary greatly from that for a jazz player or fingerpicker.
Acoustic guitar have generally a higher action than electric guitars. An action that is too high is hard on your hands and will cause the guitar to play sharp. When it is set to low, it’s easier too easy to play, but causing the strings to rattle and buzz against the frets.
Action adjustments are made to improve the feel of the instrument, decrease pressure on your fingertips which can be severe when the action is too high, avoid buzzing and generally just get the best sound out of an instrument. Most instruments are set-up at the factory with higher action then necessary. This is because it is easier to drop the action than it is to raise it. Adjusting the action can be a costly undertaking. Raising action can require replacement of the nut, saddle and neck rod (since nylon string guitars rarely have adjustable neck rods, this step would be eliminated), while cutting them both lower can be done by resetting the neck. Often an inexperienced repairperson will plane down a bridge in order to lower action which not recommended as it can result in the loss of both volume and tone.
Depending on the abilities of the instrument and the needs of the player adjustments can be made to improve the instruments action and increase the comfort of playing. If you feel that you would like to adjust your action, take your guitar to a repair shop and play in front of the repair guy so he can observe your playing style so he can set it right for you.