A bypass capacitor is used between the power supply and ground to stabilize voltage and filter out noise in electronic circuits. It does not cause a short circuit because it only allows AC signals to pass through while blocking DC, effectively smoothing out fluctuations. The capacitor charges and discharges as needed, maintaining a steady voltage level. This practice is essential for the reliable operation of microcontrollers like PICs. Understanding the function of bypass capacitors is crucial for effective circuit design.