From Mac Guides
MP3 is a lossy audio compression format popular for music files. It allows songs to be compressed to a relatively small size, usually about 4 MB, while still being of reasonable quality. MP3 files can be encoded in a user-specified bitrate, so the audio quality can be set as required, however the most common bitrate is 128 kbps. Although this is sufficient for many people, others think quality loss at this bitrate is noticeable and prefer bitrates of up to 320 kbps (the maximum supported by the format).
Invented in 1991, the MP3 format has become extremely popular in the last decade, particularly on P2P networks and more recently for users of portable music devices such as the iPod. However, due to the lack of any Digital Rights Management (DRM), the format didn't used to be used to sell music commercially, however aside from the iTunes Store which uses AAC most music stores including Amazon's and Real's now sell MP3's that are DRM free and can be used on any MP3 player, including the iPod.