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Physicalism simply states that everything in this world is physical, or as contemporary philosophers sometimes say, everything supervenes on the physical. Physicalism implies that everything is made up of matter and therefore takes up space. Physicalism directly leads you to ask questions like: What are pain, fear, and happiness? Are these made of matter too? We can't image these things in a physical form; intuitively, they seem to be mental and immaterial, though for anyone who's experienced them, they're not abstract! Physicalism is often a topic of discussion and debate in philosophy of mind. Physicalism also implies that everything can be explained within the realm of physics, and thus is a supporting tenet of reductionism.
Dualism is in contrast with physicalism. While the body is made of matter, the mind is viewed as an unworldly type of non-material. Physicalists challenge this view, arguing that all mental states and events can be reduced to matter and energy. Physicalists often use an example of c-fibers firing. They say that when you're in a particular mental state, such as a particular pain, it can be described entirely in terms of the activities of the human brain on a neural basis. So the physicalist view is that we can reduce any mental state so that it is completely described as events in neurons that are made up entirely of matter and energy.
One of the most famous logical arguments against physicalism features "Mary the master neuroscientist." This is a case that deals with qualia, the felt qualities of experience. Mary is a master neuroscientist that was born in a black and white room with everything in it being only black or white. She has never left the room and has never seen a speck of color. She has spent her time learning all there is to be known about neuroscience and physics. Mary has read all about color and knows why and how we see color. If physicalism were true, then Mary knows everything there is to know about the world. One day Mary is let out and the first thing she sees is a ripe red tomato. So, what did Mary just learn if she know everything there was to know about the world before? This thought experiment supposedly negates the possibility of physicalism because Mary learned something about the color red that she didn't know before being let out. Therefore everything in the world cannot be explained by physics.
Stoljar, Daniel, "Physicalism", The Stanford Encyclopedia of Philosophy (Spring 2001 Edition), Edward N. Zalta (ed.), URL = http://plato.stanford.edu/archives/spr2001/entries/physicalism/.
"Physicalism", The Wikipedia (April 2004), URL= http://en.wikipedia.org/wiki/Physicalism.