Virtualization is a technology that allows multiple simulated environments or resources to be created from a single physical system. It involves abstracting resources like servers, storage, and networks so they appear dedicated but are actually shared. Virtualization provides benefits like isolation between users, resource sharing, flexibility, security, and cost savings by eliminating the need for multiple physical systems. It works by using virtualization software to run multiple operating systems and applications on the same server simultaneously while maintaining isolation between them.