Virtual memory is a technique that allows a computer to use parts of the hard disk as if they were memory. This allows processes to have more memory than the physical RAM alone. When physical memory is full, pages are written to disk. Page replacement algorithms like FIFO, LRU, and OPT determine which pages to remove from RAM and write to disk when new pages are needed. Virtual memory improves performance by allowing swapping of infrequently used pages to disk.