The bake shop is a building used by the Patron to produce a variety of foods which can be sold on the market or through the shop's sales stock. It can be upgraded to a Bakery and eventually into a Pastry Shop. It produces barley bread and biscuits among other things.
It's often a good idea to build a bake shop only after building a croft and windmill. Otherwise, there is a risk of the market running out of flour, leaving your bake shop unable to continue working until flour becomes available again, which may take a while.