The function f(x,y) = x^2 + y^2 defines a surface in three-dimensional space where the value of f corresponds to the square of the distance from the origin in the xy-plane. This function is important because it showcases how values of x and y contribute to the overall output, illustrating concepts like limits and continuity in multiple dimensions. The surface formed by this function is a paraboloid, which can help understand behavior around points and how functions approach certain values.