Imagine a block of air, or air parcel, rising upwards through the atmosphere. The walls of this block are solid so that the air inside does not mix with the outside air.

Since temperature of the atmosphere decreases with height, the temperature of the air parcel cools as it rises upwards.

If the air cools to its saturation point, the water vapor "condenses" (changes from gas to liquid) to form tiny water droplets. Since it requires an extremely large number of water droplets to produce a cloud, the air must contain enough moisture otherwise a cloud is unlikely to form, let alone precipitation which requires even more.