A web server is a computer that serves websites.
Web servers can host more than one website. A site that get a LOT of traffic may need a dedicated server(s). This costs thousands of dollars.
On shared hosting, hosting usually is discounted down to $10/mo or so because resources are shared between many sites.
The problem with shared hosting is 99% of web hosts cram as many websites as they can on to a web server. This is very cost effective for them. Often, sites perform ok, loading in 2-3 seconds. However, site speed is an SEO factor (source: Google). For those that need every competitive edge possible or just want a pleasant experience for their users, a fast, performance site is a must.
Here at Telapost.net, we host only a handful of sites belonging to small businesses. This results in a server that is completely overkill, and, extremely fast. Don’t take our word for it, go poke around the site and look at how freaking fast this server is.