MPEG-1 or MPEG-2 Audio Layer III, more commonly referred to as MP3, is a patented digital audio encoding format using a form of lossy data compression. It is a common audio format for consumer audio storage, as well as a de facto standard of digital audio compression for the transfer and playback of music on digital audio players.
The use in MP3 of a lossy compression algorithm is designed to greatly reduce the amount of data required to represent the audio recording and still sound like a faithful reproduction of the original uncompressed audio for most listeners. For example: An MP3 file that is created using the setting of 128 kbit/s will result in a file that is about 11 times smaller than the CD file created from the original audio source. An MP3 file can also be constructed at higher or lower bit rates, with higher or lower resulting quality.
The compression works by reducing accuracy of certain parts of sound that are considered to be beyond the auditory resolution ability of most people. This method is commonly referred to as perceptual coding. It uses psychoacoustic models to discard or reduce precision of components less audible to human hearing, and then records the remaining information in an efficient manner.
Further information and deeper analysis: MP3 on wikipedia
