Thread priorities determine the order threads are executed, with higher priority threads running first. Priorities range from 1 to 10, with 5 as the default. The scheduler allocates CPU time to the highest priority ready thread. Preemptive scheduling allows a new, higher priority thread to interrupt a currently running lower priority thread. For threads of equal priority, round-robin scheduling evenly allocates CPU time slices. The example demonstrates setting thread priorities and the effect on execution order.