An object $X$ is a generator of a category $\mathcal{C}$ if the functor $Hom_{\mathcal{C}}(X,\_) : \mathcal{C} \rightarrow Set$ is faithful.
I encountered the notion in the context of Morita-equivalence of rings, but I don't understand what its use is. Why is $X$ called a "generator"? What does it generate?
Generators don't generate the category. This explains why "generator" is an unfortunate terminology. A better one would be "separator". I've seen this suggestion in many places. This makes sense, because every two non-equal morphisms $f,g : A \to B$ may be separated by a morphism $i : X \to A$, i.e. $fi \neq gi$.
However, assume that our category has coproducts. Then, if $A$ is any object, then there is a canonical morphism $\bigoplus_{f \in \hom(X,A)} X \to A$ and this is an epimorphism - exactly because $X$ is a generator. This looks more like a generating set (remember that for example an $R$-module $M$ is generated by a subset $S$ if and only if $\bigoplus_{s \in S} R \to M$ is an epimorphism).