Typical Speech and Language development 2-3 years old
By this age your child is beginning to understand meaning in their world. They can differentiate between words such as in/on, up/down, go/stop and follow two step requests. You will notice that they will stay more attentive during stories and will be able to answer simple questions relating to the story.
This age range typically yields a boost in vocabulary. At age 2 children typically use 200-300 words. By age 3, children typically use up to 1000 words!! You will notice them starting to talk about everything. They will start to put words together (2-3 words) to make short phrases/sentences. They will be able to name common functional objects and will direct other's attention to them.
By 3 years old, children typically have mastered the following sounds in their speech: p, m, h, n, w, & b. They may continue to reduce consonant blends ("poon" for spoon) or glide r & l ("wun" for run or "wip" for lip) but this developmentally okay. A child typically is 50-75% intelligible by 3 years of age.
In this stage it is important to use language expansion strategies that I have posted about before. For example: If your child says "big truck" you could model "Yes I see a big blue truck" If you child points and says "look flower" you could model "That's a pretty purple flower." Speak to them with clear and easy to imitate speech (no baby talk at this age!!).
Read more at http://www.asha.org/public/speech/development/23/