Now I don't want to sound rude (Steve1), but pretty much every manual that comes with these bits of hardware explains how all this works. A little bit of research on your part would also help.
However, let me explain.
A network is a collection of computers or network capable devices, all connected to each other. Today, this connection is either through a switch with cat-5 (ethernet cable) (the ports on the back of your/most router) or wireless (which still acts as a router).
Each of these devices will have 2 things to identify it. A MAC address and an IP address. A MAC address is hard coded into your wireless or network card and doesn't change. Kind of like a chassis number on a car. The IP address is an address in the form of a number such as this 192.168.0.123 which also identifies your PC, but at a different "level" in the structure. Each machine on the network must have a unique IP and MAC. All MACs are unique but it's very easy to force a PC or Apple to use a specific IP address, called a static IP. If 2 machines on the same network have the same IP, one, or both won't work. Trying to remember all the numbers you gave your machines so you don't double up can be a real pain.
This is where DHCP comes in. It stands for Dynamic Host Configuration Protocol. What this does is every time a new device connects to a network, the device "calls out" and says "hello, I'm new here, can someone help me out", and the DHCP server (your router) will shout back "Hello, I'll help, here is all the information you need" and assigns the new device an IP address which is unique, and gives it the information to allow it to get out to the internet etc.
The wireless "password", or WEP/WPA key is required to enable you to secure your wireless network so that only those that know the password/key can get on. This is very handy. There isn't really a science to this. WEP is the old way of doing it, becaus eyou need to create a long string of numbers/letters as the key, which is a pain to type in. WPA is newer and allows you to use a "word", such as "RTFM" and this will create a dynamic key which is much more secure and all you need to do is type that word into any machine you want to connect.
So hopefully that'll help