In Terraform, variables can have default values. When Terraform runs, it checks if the user provided a value for the variable. If not, it uses the default value specified. If the user provides a value, that value overrides the default. This behavior ensures Terraform has a value to use and avoids errors from missing inputs. The example shows a variable 'region' with a default of 'us-west-1'. If no input is given, Terraform uses 'us-west-1'. If the user provides 'eu-central-1', Terraform uses that instead. Removing the default without providing input causes an error.