Lambda functions in Python are small, unnamed functions defined with the keyword 'lambda'. They are used to write quick functions inline without giving them a name. For example, 'add = lambda x, y: x + y' creates a function that adds two numbers. This function can be called like a normal function, such as 'add(3, 5)', which returns 8. Lambda functions are limited to a single expression and are often used when a simple function is needed temporarily, such as passing it as an argument to another function. This makes code shorter and easier to read when the function logic is simple.