All it does is copy the application. Most Mac applications include all the support files they need inside the executable, so installing is as simple as copying them.
There's no reason you couldn't install them somewhere else; the Applications folder is just a convenient place to find them all. (There are also seperate Applications in each User folder, for programs you don't want anyone else to use.)
Uninstalling usually just involves Trashing the application you don't want. (Sometimes, though, programs create temp files, preference files, or other "leavings" in the /Library/Application Support or /Library/Preferences folders. Most of the time, these are harmless, but some programs are especially messy and leave large files there; if this is the case, Trash those, too.)
