Dijkstra's algorithm is used to find the shortest paths from a source node to all other nodes in a network. It works by marking all nodes as tentative with initial distances from the source set to 0 and others to infinity. It then extracts the closest node, adds it to the shortest path tree, and relaxes distances of its neighbors. This process repeats until all nodes are processed. When applied to the example network, Dijkstra's algorithm finds the shortest path from node A to all others to be A-B=4, A-C=6, A-D=8, A-E=7, A-F=7, A-G=7, and A-H=9.