A broadcast domain is a portion of a network in which layer two broadcasts will be forwarded to each device. Generally speaking, layer two broadcasts are not forwarded by layer three devices such as routers. For this reason, broadcast domains are typically co-extensive with IP subnets.
One way to visualize the extent of a broadcast domain is to consider transmission of broadcast frames (such as ARP requests), as local networks grow in size and complexity.
Any given Ethernet segment is a single broadcast domain, because all hosts on the network receive broadcast messages from any other host.
As Ethernets grow in physical length through the addition of hubs or repeaters, the resulting multi-segment Ethernet is still a single broadcast domain. (Hubs and repeaters do nothing to filter broadcast traffic, or any other type of traffic for that matter.)
When Ethernets are extended through the insertion of layer two switches, there still remains just one single broadcast domain. Although switches filter traffic based on destination MAC address, the broadcast destination MAC address (FF:FF:FF:FF:FF:FF) is routinely forwarded out all switchports. (Note the constrast to collision domains. Layer two switches create as many different collision domains as they have switchports. Still, they do nothing to filter broadcasts.)
At layer two, the intervention needed to reduce the scope of any given broadcast domain is the VLAN. Different hosts, even attached to the same switch, will not receive broadcasts from each other without being on the same VLAN. Indeed, without inter-VLAN routing, different hosts on different VLAN's will not see any traffic from each other at all! With inter-VLAN routing being applied (via a layer three switch or a router), hosts on different VLANs will see unicast traffic from each other, but they still will not see broadcasts, which will be dropped at the layer three boundary.
The effect above of inter-VLAN routing is a special case of the more general treatment of Ethernet traffic by routers. Routers discard layer two frames in their input buffers. After making forwarding decisions, the routers reapply layer two framing (possibly under a different protocol entirely) at the outbound interface. Along the way, all Ethernet broadcast frames are filtered and discarded.
Very large broadcast domains can be problematic for performance and security reasons. ARP requests, in particular, are frequently transmitted by hosts in the midst of common transactions such as web page requests or email forwarding. Some degree of network segmentation is generally advisable to reduce the scope of broadcast domains and to insulate workgroups from each other. For this reason, VLAN and/or subnet specification, along with the strategic inclusion of layer three devices at the distribution layer, is a typical element of local area network design for anything beyond very smal scale networks.
Misconfigured switches can cause frames to replicate endlessly and to travel in a loops. Such an event is called broadcast storm. Spanning Tree Protocol (STP) enables switches to have multiple redundant connections (a physical loop), while disabling selected links to prevent broadcast storms.