(An allusion is a reference to something often without explicitly naming it; often it is what is referred to as a "casual or passing mention.")
In Act II, Scene 1, Mercutio makes three allusions, specifically to Venus, the Roman goddess of Love and Beauty, and to a king named Cophetua who, after being struck by Cupid's bow, fell in love with the first thing he saw, a poor maid, likening Romeo to this king.
Speak to my gossip Venus one fair word,
One nickname for her purblindson and heir,
Young Adam Cupid, he that shot so trim
When King Cophetua lov'd the beggar maid!
He heareth not, he stirreth not, be moveth not; (2.1.13-17)
Then, without explicitly naming Cupid again, Mercutio alludes to him in this line: "If love be blind, love cannot hit the mark" (2.1.35). Further, Mercutio realizes that Romeo may be listening, but refusing to respond. So, he suggests that they bid Romeo a "good night" and not seek him; Benvolio, too, realizes that they search in vain for their smitten friend.
Mercutio's dialogue in Act 2, Scene 1 of Romeo and Juliet is full of bawdy allusions to sex and sexual matters. For example:
'Twould anger him
To raise a spirit in his mistress’ circle
Of some strange nature, letting it there stand
Till she had laid it and conjur'd it down.
By "his mistress' circle" Mercutio is alluding to Rosaline's genitalia. By "letting it there stand," Mercutio is alluding to Romeo's erection, which he suggests would remain "standing" until "she had laid it and conjur'd it down," meaning untll Rosaline had had sexual intercourse with Romeo and by this means had "magically" made it flaccid.
Mercutio's is a foil to Romeo. Whereas Romeo is idealistic and romantic about love, Mercutio is coarse and vulgar--but certain to raise a great deal of laughter in Shakespeare's audiences. Another example of Mercutio's sexual allusions in this very short scene is the following:
Now will he sit under a medlar tree
And wish his mistress were that kind of fruit
As maids call medlars when they laugh alone.
A medlar is a kind of apple which is only edible when ripe enough to burst. It was thought to resemble female genitalia, which is why young women might joke about it but only if no men were present.
Mercutio is employing allusions in his bawdy dialogue because even he would think it was too gross to call some things by name. The same is true in the following:
I conjure thee by Rosaline's bright eyes,
By her fine foot, straight leg, and quivering thigh,
And the demesnes that there adjacent lie,
That in thy likeness thou appear to us!
Mercutio's conjuration travels from Rosaline's foot, up her leg, and then up her thigh. By "the demesnes [i.e. regions] that there adjacent lie" he is obviously alluding to her genitalia again. Both Benvolio and Mercutio suspect that Romeo is hiding from them within hearing distance. This is true, but Romeo is not angered by Mercutio's vulgar allusions because he has fallen in love with Juliet and out of love with Rosaline. In the next scene he will show that he did indeed hear every word. He speaks one of the most frequently quoted lines in the entire play:
He jests at scars that never felt a wound.
Then follows the famous Balcony Scene in which the rhapsodical poetic dialogue is in maximal contrast to what was heard in Scene 1. The Balcony Scene contains such famous lines as:
What light through yonder window breaks?
It is the East. and Juliet is the sun.
O Romeo, Romeo, wherefore art thou Romeo?
There is a sharp and deliberate contrast between the vulgarity of Scene 1 and the passionate romanticism of Scene 2, as well as between the characters of Mercutio and Romeo, respectively.