The first effect of the precedence declarations is to assign precedence levels to the terminal symbols declared. The second effect is to assign precedence levels to certain rules: each rule gets its precedence from the last terminal symbol mentioned in the components. (You can also specify explicitly the precedence of a rule. See Context-Dependent Precedence.)
Finally, the resolution of conflicts works by comparing the precedence of the rule being considered with that of the lookahead token. If the token’s precedence is higher, the choice is to shift. If the rule’s precedence is higher, the choice is to reduce. If they have equal precedence, the choice is made based on the associativity of that precedence level. The verbose output file made by -v (see Invoking Bison) says how each conflict was resolved.
Not all rules and not all tokens have precedence. If either the rule or the lookahead token has no precedence, then the default is to shift.