Explanation
Box 1: Categories only
Box 2: Categories and Subjects
Note:
* Using the Categories entity, you can create hierarchical categorical data to help group records. Categorizing entity records in Dynamics 365 Customer Service helps you tag the records so that you can easily search them.
Use the entity to create and manage a logical structure of categories in Dynamics 365 Customer Service, and then associate entity records to one or more categories.
Categories are useful for reporting, sorting, segmenting, and categorization of records.
* The customer engagement apps (Dynamics 365 Sales, Dynamics 365 Customer Service, Dynamics 365 Field Service, Dynamics 365 Marketing, and Dynamics 365 Project Service Automation), include a subject organizational structure that lets you mark and categorize service cases, knowledge base articles, products, and sales literature. By using the subject hierarchy, you can classify service cases to quickly provide service to your customer. You can also provide the appropriate sales literature. You'll also be able to better understand gaps in your sales literature, evaluate service quality by subject area, and improve reporting on the performance of your products.
Reference:
https://docs.microsoft.com/en-us/dynamics365/customer-service/create-manage-categories
https://docs.microsoft.com/en-us/power-platform/admin/define-subjects-categorize-cases-products-articles