The Circle of Confusion refers to the behaviour of objects that exist outside the focal range of a camera lens. Kris Malkiewicz provides this explanation in his excellent book Cinematography:
“If we were to photograph only one distant point, such as a light, the lens would be in focus when it projects a point onto the film.
Because the lens can be focused for one distance at a time, objects closer and farther away will be slightly out of focus. In [our example] a second, closer light would have its image formed behind the film plane and be represented on the film as a circle. A third light, farther away, would form its image in front of the film plane and also appear on the film as a circle. These circles are called “circles of confusion,” and they vary in size depending on how far out of focus they are. The “confusion” is that circles smaller than 1/1000 inch confuse our eye and are seen as points in focus. This allows us to see pictures of three-dimensional objects that appear in focus.
We have a range in which objects will appear sharp. It runs between the closest and farthest objects represented as circles of confusion smaller than 1/1000 inch. This range is called “depth of field” (and is sometimes incorrectly called “depth of focus”).