A niche is the role an organism plays in the environment. The concept of a niche takes into account the organism's place in the food web, its needs for space, water, shelter, sunlight, and a variety of other factors. In every niche there is a limiting resource; this means a resource that controls the population of an organism that depends on it. If there is plenty of the limiting resource around, then the population of the dependent organism will increase. Over time, the larger population will cause the resource to become scarce. The scarcity of the resource will cause the population to decline.
If a resource is needed by more than one species, then inter-species competition will develop. Since virtually all niches overlap at some parameter or other, there is a greater likelihood that a shared resource, because it is being used by more than one species, will become limiting Competition for that resource may determine whether a species can exist in a given area.
The niche is the "way of life" of a species. However, due to limited resources--food, space, water, etc, many species may be in close proximity in an ecosystem. In nature, if two species have overlapping niches, this will lead to increased pressure on a species due to competition. Once species compete, the more adapted one will thrive while the other may perish. This idea is known as the competitive exclusion principle. Rather than competing, niche differentiation will occur. This allows different species to use resources at different times, or in different locations to reduce competition and allow them to coexist. An example of this is Darwin's finches in the Galapagos Islands. Many different finch species can occupy the same tree however, some may feed on the ground, some in the middle of the tree, some near the top, and due to different variations in beak size, they may eat different foods--seeds, insects or nectar. This allows coexistence without the threat of extinction.