EC2 instances are virtual machines (VMs). VMs share an underlying physical machine with other instances (this is called multi-tenancy). This is enabled by software called a hypervisor. VMs are isolated but share resources.
When you provision an EC2 instance, you can choose the operating system as Windows or Linux. You can provision thousands of EC2 instances on demand. They are resizable so you can start small and then give your instance(s) more memory and CPU. This is the "elastic" nature of EC2 and is known as vertically scaling an instance. You can also control networking in EC2. Essentially you can choose what requests get to your server.
Virtualization is not a new concept; but AWS makes it more convenient to acquire servers via its Compute-as-a-Service model.
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