To demarcate is to set or draw a boundary, like that of a country. It can also mean to separate clearly in other ways.
When you demarcate, you’re creating a boundary. Election officials who create or change boundaries between districts are demarcating. Demarcating usually starts with making lines on a map, but those lines have power in the world, as they change the size of a district, state, country, or other place. The word can be used more broadly for creating other types of separation. At work, a boss could demarcate which employees are responsible for which work, which is another kind of separation.