AJAX allows parts of a web page to be updated asynchronously by exchanging small amounts of data in the background without reloading the entire page. It uses a combination of XMLHttpRequest objects, JavaScript, DOM, and CSS. When an AJAX request is made, JavaScript code calls an XMLHttpRequest object to request data from the server in the background. The returned data is then used to update specific elements on the web page without reloading. While AJAX improves interactivity, it also has drawbacks like pages being harder to develop and not registering with the browser history.