A TeX input file is, basically, a plain text file: that is, an unstructured sequence of bytes. For any program or application using this kind of files, they are just sequences of numbers from 0 to 255.
The fact that you, TeX, and your text editor see them as symbols and letters is because there is a convention that associates every number to a letter - the encoding. This is well until you realize that there are scores of encodings, and if the set of applications you are using do not agree about it, things happen.
Unfortunately, there is no standard way to say which encoding a file is using - you have to know it. And the package
inputenc is the way to tell LaTeX which encoding you are using.
utf8 is a de-facto standard nowadays, so the beat option is to convince your editor to use it, and add
to your input file. And if you use a modern engine like
luatex the encoding must be utf8 and you do not even have a choice (so you shouldn't use
A must-read about encoding is this blog post by Joel Sposky: http://www.joelonsoftware.com/articles/Unicode.html