There are two types of dust: One is pixie dust, which flows from the heart of the Pixie Dust Tree, and the other is fairy dust, which is created by grinding the molted feathers of Mother Dove. Though they are created differently, they are functionally the same, allowing fairies to fly and perform magic. Inanimate objects sprinkled with dust will float,  and it will allow humans and other non-flying animals to fly if they think happy thoughts.
Pixie DustPixie Dust flows from the heart of Pixie Dust Tree. The Pixie Dust Distribution Depot is positioned beneath the Pixie Dust Tree to catch it when it falls, and from there the dust is refined and rationed out.
Blue Pixie Dust
Blue pixie dust is produced by shining the light of the blue harvest moon through a moonstone at 90°. It's used to replenish the strength of the pixie dust tree so that it keeps on producing pixie dust. It also acts as an amplifier, making any dust it's mixed into more potent. For more information, see the main article.
Alchemized Pixie Dust
In The Pirate Fairy, Dust-talent fairy Zarina discovered the process of pixie dust alchemy, by which she was able to create dust that would allow fairies to perform feats and skills associated with other talents, or in essence, "switch" talents. For more information, see the main page on Pixie Dust Alchemy.
After the destruction of the Pixie Dust Tree, Never Land granted the power to create dust to Mother Dove. Once a year, she sheds some of her feathers during the Molt. These feathers are gathered by Dust-talent fairies, who grind it into powder at the dust mill. The dust is stored in hollowed-out-and-dried pumpkins. Blue, nor any other color of dust is shown to exist at this point.
The part of Mother Dove where the feathers are taken from determines the potency of the dust itself. This differs from the dust that comes from the Pixie Dust Tree, which has the same potency no matter where it is taken from. Terrence tells Tinker Bell that the feathers from Mother Dove's chest, for instance, produce dust which is better suited to fixing things. Most pixie dust that comes from Mother Dove's feathers is made from feathers that are molted naturally, but feathers that are pulled out by force create a more potent dust. This process is painful to Mother Dove, so most fairies look very negatively on anyone who does this. (Vidia, who did this to create dust to make her fly faster, was banned from ever coming near Mother Dove again. )
Using Dusts for Magic
In the books, fairies sprinkle fairy dust on the things they want to magically manipulate. For example, in The Trouble With Tink, Tinker Bell sprinkled fairy dust on her makeshift hammer to tighten the wire holding the stone to the stick. Rani created a twelve-inch fountain by sprinkling fairy dust into the water. With practice, Prilla (a non-water talent fairy) was able to create a small fountain in her soup.
In the movies, fairies are never shown sprinkling Pixie Dust on items to manipulate them, except to make them float, as shown in Tinker Bell's balloon/airship in Tinker Bell and the Lost Treasure. In the same film, the storytelling-talent fairy Lyria used Pixie Dust to illustrate her story.
According to both the Books and the movies, Pixie Dust is used for a variety of things by the fairies, according to their talents. All fairies use Pixie Dust on their wings to fly, or on non-flying creatures or objects to make them float. Pixie dust is also used to augment a fairy's talent, such as making plants grow faster (for Garden-talent), adding to medicines (for Healing-talent), or as glue for inventions (such as by Tinker-talent in the Books) If the Pixie Dust is thrown on Humans make them fly if they have happy thoughts. If it is played on a non-flying animal it will fly anyway.