In the source header you can declare:
#!/usr/bin/env python
# -*- coding: utf-8 -*-
....
It is described in the PEP 0263:
Then you can use UTF-8 in strings:
#!/usr/bin/env python
# -*- coding: utf-8 -*-
u = 'idzie wąż wąską dróżką'
uu = u.decode('utf8')
s = uu.encode('cp1250')
print(s)
This declaration is not needed in Python 3 as UTF-8 is the default source encoding (see PEP 3120).
In addition, it may be worth verifying that your text editor properly encodes your code in UTF-8. Otherwise, you may have invisible characters that are not interpreted as UTF-8.