It's usually the lens and not the software that does this... although I'll get to the software in a moment.
When a camera focuses on a subject at some distance, that subject is expected to be sharp. But other elements in the image which are either closer or farther from the focused subject may not necessarily also be sharp. Whether or not they also appear sharp depends on how close they are to the lens' focused distance and some thing called the "Depth of Field" (we commonly abbreviate that as "DoF")
The DoF is not a distance...it's a range. It's the range of distances at which any element that falls within that range of distances will appear to be more-or-less in acceptable focus. Outside that range, things will seem blurred (initially just very slightly blurred, but the farther away they get, the stronger the blur.)
It turns out three factors influence this:
1) The subject distance. When the focus distance is very short (subject is close to camera) the DoF will naturally tend to be narrower. This makes it easier to develop strong blur in elements in the distance. If the subject is far away, the DoF tends to become more broad.
In other words if I focus on a plate of food just a few feet away, someething which is just a few more feet away will be more likely to be out of focus. But if I focus on a person 100' away, then something with is just a few more feet beyond them will probably ALSO be in accpetably sharp focus.
2) The focal length of the lens plays a big factor. Wide-angle lenses (short focal lengths) tend to have naturally broad DoF. I have, for example, a 14mm lens (ultra-wide angle). I can focus that lens to about 3' and the whole world is in pretty good focus (not perfectly though). If I wanted to develop a strong blur in the background, then that ultra-wide lens would NOT be the lens of choice. And not surprisingly the opposite is true when I use very long lenses (telephoto). They tend to have somewhat shallow DoF.
3) I saved this for last since it's the most complicated to understand... this is how the "focal ratio" (or f-stop or "aperture") effects the DoF. The lens has an opening through which the light can flow into the camera. That opening has a diameter. If you divide the focal length of the lens by the diameter of that opening the result is what we call the "focal ratio". In other words, suppose I have a 50mm lens and the aperture opening is 25mm wide... that lens is f/2 ("f/" is the shorthand for "focal ratio") because 50 ÷ 25 = 2.
It turns out the lower the focal ratio, the shaller the DoF and the easier it is to blur the background. At high focal ratios the opposite happens... the DoF is increased and the amount of blur you get even on subjects outside the DoF is not very much.
All of these three effects are combined. To create a strong background blur you want a long-ish focal length lens with a LOW focal ratio and you want your subject CLOSE with the elements you want blurred in teh distant background.
With that, here's an example that I've already posted on this site:
Incidentally, I didn't take this while dining. This was a food shoot for the restaurant. This food was plated up just for the photography. The restaurant was closed at the time. There are some large open windows to the right which are providin a nice broad lighting source (for soft lighting) but the left side was far too dark. I was going to try to supplement with lights, but instead opted to use one of my large diffuse reflectors. The chef (not pictured here) is actually holding the reflector for me on the left and he's bouncing some light into the left side of the food to brighen it up a bit and balance this shot. You can see that the left is a little darker, but not substantially darker (and that's exactly what I want.)
Now here's another example and this dish created a problem for me. I don't believe I've ever posted this next image on this site before. What I'm about to show you is NOT THE FINAL IMAGE:
I'll call your attention to what I don't like in this image... see that bottle of wine? If you check it carefully, you'll see that moderately blurred label says it's a bottle of Silver Palm (a nice wine, btw). But I don't want you to be able to read the label. That detracts your attention from the food here and THAT's what I want the viewers to see. This image is supposed to be displayed alongside the image of the perch and I want them both to have about the same level of blur... and they don't (hence this is not the final image.)
As I shoot this, I'm using the same camera, same tripod, same table. Same everything... except the focal ratio is now f/8. That's WHY the background only has a very moderate blur. f/8 doesn't allow as much blur as f/4.
So why not just shoot it at f/4... problem solved, right? It turns out that created another problem. This dish (eggplant, btw) looked best when angled. The problem with that is f/4 wouldn't allow me to get the two towers both in focus. I had to stop down to f/8 to achieve focus on the dish... but stopping down ALSO means that the background isn't blured to match the shot of the perch. That's a problem.
To solve that, I cheated. Here's the cheat:
Notice this shot looks a lot like the previous shot EXCEPT for the level of blur in the background... which now matches roughly the level of blur in the perch (exactly what I wanted.)
But this blur isn't natural... it's done in Photoshop.
Photoshop uses "layers" to perform adjustments and to do this I needed to duplicate the image so that I have three "layers" and they're all identical.
On the front-most layer, I carefully select the "plate" of food and remove everything else.
On the next layer, I apply a Photoshop "Lens Blur" effect which I fiddled with until it matched the natural blur of the perch.
Viewed together this gets close to what I want, but there's this horrendous "halo" that the edge of the food plate has because the blurred layer has a blurred copy of everything and my cut-out of the front layer cleanly cuts off the plate. So what you see is the blurred edge of that background copy of the plate and it looks bad (you'll have to trust me).
So the third layer is another "front" layer in which nothing is blurred. I then take my stylus and graphics tablet and use that to "clear" the second layer (the blurred layer) but JUST around the edges of the plate. By "clearing" the second layer, what you see through the clearing is the third layer beyond (which I haven't blurred.)
The order of layers is important in photoshop... you always see what's in front (unless that layer has a clear spot in it...then you see see what's in the layer beyond... and so on.)
Put it all together and what you get is sharp food, a natural transition from plate to background (which is really in the third layer) and then the nicely blurred background (via the Photoshop "Lens Blur" filter) and it all resembles the natural effect I got with the perch shot at f/4 (except this was done at f/8).
So yes... you can do blur "in software". BTW, this was a somewhat more advanced use of Photoshop and I had to work on this image for a while to pull it off. It doesn't work with every image. I've had lots of images that due to the way the foreground and background presented themselves, there was no neat way to pull off the blur. It worked for this image because the rectangular plate actually goes from edge to edge in the image (notice the extreme left and extreme right are out of frame) and that created a border of separation that I needed. I would NOT suggest trying to apply fake-blur to most images (much of the time it either doesn't work or it doesn't look very convincing when it's done.)
