MP3 (more)

MP3 is an audio-specific format. It was invented by a team of international engineers at Philips, CCETT (Centre commun d'études de télévision et télécommunications), IRT, AT&T-Bell Labs and Fraunhofer Society, and it became an ISO/IEC standard in 1991. The compression works by reducing accuracy of certain parts of sound that are deemed beyond the auditory resolution ability of most people. This method is commonly referred to as Perceptual Coding.
It provides a representation of sound within a short term time/frequency analysis window, by using psychoacoustic models to discard or reduce precision of components less audible to human hearing, and recording the remaining information in an efficient manner. This is relatively similar to the principles used by JPEG, an image compression format.
Reference : http://en.wikipedia.org/wiki/Mp3