BitmapCache should, for the large majority of objects, be something you don't need to think about on Windows Phone 7. Silverlight for WP7 implements automatic bitmap caching of elements that are animating in ways that caching helps (translate, opacity, rotate - maybe more, I can't recall now).
Silverlight on a desktop PC (or Mac) isn't quite as smart currently, so you need to manually specify CacheMode=BitmapCache on objects using roughly the guidance pointed to by Praetorian in his answer.
There are probably edge cases where setting BitmapCache explicitly is useful even on Windows Phone, but I don't know about them offhand. You could try looking at the Windows Phone Performance Tips on MSDN.