Dijkstra's algorithm is used to find the shortest path between a starting vertex and any other vertex in a graph with positive edge weights. It works by maintaining a distance label for each vertex, with the starting vertex's label set to 0. It then iteratively selects the unprocessed vertex with the smallest distance label and relaxes any incident edges that improve neighboring vertices' distance labels, until all vertices have been processed. Storing predecessor vertices allows reconstruction of the shortest path.