Just as an adendum to Anark's w/u:

While "Pennsylvania" is Latin for "Penn's Woods," the Penn in question is not William Penn the settler, but Admiral William Penn, Knight, his father. William Penn the Younger was a Quaker who had spent much of his life hiding in Ireland to escape the persecution of his religion (he had also been expelled from Oxford). King Charles II owed Penn's late father a favor, so in 1682 he decided to give Penn a section of land in the New World, where Penn could take his fellow Quakers and set up shop, thus staying out of the king's hair. Charles suggested naming the land Penn's Woods, but Penn the Younger made sure that this refered not to himself, but to his father the Admiral, as naming the land after himself would be deemed an uncharacteristic act for a Quaker.

Of course, what Charles ignored and Penn later had to deal with was the fact that Pennsylvania was already inhabited by the Leni Lenapi (Delaware Indians) and some Swedish settlers in what is now South Philly. Penn was able to set up a deal with the Leni Lenapi, promising that his people would not go out past what is now Berks County; the tribe accepted this, and they agreed to live in peace (until the Scotch-Irish started to encroach on the Lenapi hunting grounds, killing any Indian they saw--nice neighbors, huh?). The Swedes just wanted to fish and be left alone.

Penn set up Pennsylvania as a colony where religous freedom would be practiced, not only for the Quakers, but for all people. This lead to a huge influx of Catholics, Jews, and non-Anglican Protestants. However, the Quakers did retain most of the political power. He established Philadelphia as the capital in 1683, in the area which is now Center City.