It allows a company to host a whole multitude of small virtual servers on a single computer, and this is what allows them to offer hosting at a much lower cost. Generally, the majority of websites are not going to be affected in any negative way from so many different VS being hosted on one computer. In almost all cases, the multiple virtual servers will have the same effect as if the websites were being hosted on dedicated servers. This means there is no degradation in service from having so many websites on so many different virtual servers all on one computer. It is possible though that service can be disrupted if a single computer has too many virtual servers on the same computer. This can happen if a single virtual server starts to hog a lot of resources on the computer. If this happens it will cause web pages being hosted on that computer to be delivered to people much more slowly.
Most people do not have any clue how virtual server hosting actually works. In a general shared server type of situation, there often times can be around one hundred or more users that use the same server. Each of the users is allotted a designated amount of disk space they can use on that server. There users all share the same CPU, and RAM usage and it is basically free game for any of them. This type of situation can be excellent for beginners just starting web design, that use websites not getting much traffic. If users that own websites that start getting significant amounts of traffic use these types of servers, the resources of the single computer system can get eaten up at an astounding rate. This will cause all of the other users that utilize that same server to have really slow loading websites. Dedicated servers are used for website owners that are going to be getting a lot of traffic to their websites. This is the most expensive way to host a website and is the preferred method for most large companies that are getting, or expect large amounts of traffic to their website.
Virtual servers are basically a combination of the two different types of servers. It is basically one server that is broken down into many different virtual machines and it pretty much the same as a dedicated server. Technically users will share the server with many other users, but the server is broken down into dedicated portions. This makes it so that even if there are one hundred users on the same server, if a few of them are trying to suck up the resources because they have a huge amount of traffic, it will not affect the other users because the server is broken into dedicated portions for each user. From the outside it would appear as if each user on a virtual server has their own unique server they are using. A virtual server basically acts and looks just like a dedicated server, but it really is sharing the same physical machine with many other users. This will get rid of all the problems that come along with a shared server, and is a very cost effective way for companies to provide web hosting, and is the main reason why many web hosting companies are using this exact strategy that uses a virtual server.