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Virtual private servers use virtualization technology to set up multiple virtual servers on a single physical server.
This is more affordable than paying for a dedicated server, because the costs are split across several users, but you still enjoy the added security of having your own private allotment of RAM, data storage, and usually at least one CPU.
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Virtual private servers work by using software to create a number of virtual machines on a single physical server. Each of these virtual servers has access to its own dedicated resources and can't interact with any of the other servers, which is why they're referred to as private.
In effect, a virtual private server works by simulating the effect of having your own dedicated server hardware. You get many of the benefits of a dedicated server, like added security and dedicated resources to help your website run smoothly, without the expense of paying for an entire server by yourself.
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