The name of the file extension and also the name of the type of file for MPEG, audio layer 3. Layer 3 is one of three coding schemes (layer 1, layer 2 and layer 3) for the compression of audio signals. Layer 3 uses perceptual audio coding and psychoacoustic compression to remove all superfluous information (more specifically, the redundant and irrelevant parts of a sound signal. The stuff the human ear doesn't hear anyway). It also adds a MDCT (Modified Discrete Cosine Transform) that implements a filter bank, increasing the frequency resolution 18 times higher than that of layer 2.
The result in real terms is layer 3 shrinks the original sound data from a CD (with a bit rate of 1411.2 kilobits per one second of stereo music) by a factor of 12 (down to 112-128kbps) without sacrificing sound quality.
Because MP3 files are small, they can easily be transferred across the Internet.