Linux – KVM Host with 88 physical cores uses only 14 on 64 core Guest

A virtual CPU equates to 1 physical core, but when your VM attempts to process something, it can potentially run on any of the cores that happen to be available at that moment. The scheduler handles this, and the VM is not aware of it. You can assign multiple vCPUs to a VM which allows it to run concurrently across several cores.

Cores are shared between all VMs as needed, so you could have a 4-core system, and 10 VMs running on it with 2 vCPUs assigned to each. VMs share all the cores in your system quite efficiently as determined by the scheduler. This is one of the main benefits of virtualization - making the most use of under-subscribed resources to power multiple OS instances.

If your VMs are so busy that they have to contend for CPU time, the outcome is that VMs may have to wait for CPU time. Again, this is transparent to the VM and handled by the scheduler.

I'm not familiar with KVM but all of the above is generic behavior for most virtualization systems.

Yes, you can configure and run more virtual CPUs than physical cores available. This is an idle Windows Server 2008 (x86, German) KVM guest showing 10 CPUs on a 4-core single-CPU Intel X3210 machine:

But you only should do so when you know, what you are doing:

For one, this will be accompanied by the overhead of timing / synchronizing more virtual CPUs without the benefit of having additional execution units to run the load on. The even more significant overhead is that your host will have to perform context switches more often than necessary whenever the number of threads scheduled for immediate execution is higher than the number of physical CPUs available. The guest OS's thread scheduler would work against the Hypervisor's scheduler leading to a serious performance degradation.

So if you've migrated a VM to a host with a fewer number of pCPUs, you should offline a number of vCPUs to match the number of your available pCPUs. At least with Linux it could be done without restarting by toggling /sys/devices/system/cpu/cpu<X>/online.

Another theoretical approach to reduce the number of CPUs on a running system would involve the use of CPU hot-plugging, but OS support for this feature is rather sparse and KVM would not allow for online reconfiguration of the number of CPUs as well.