Pip is a tool for installing and managing Python packages. Virtualenv allows creating isolated Python environments and avoids system-wide installations of packages. It is recommended to create a separate virtualenv for each project to isolate packages and versions. Key commands include mkvirtualenv to create, workon to activate, pip to install/uninstall packages, and deactivate to exit a virtualenv. Virtualenvwrapper makes working with virtualenv easier. Environment variables can be set on virtualenv activation to configure database credentials for each isolated project environment.