MP3 stands for MPEG-1 Audio Layer III. It is not a separate format, but a part of MPEG-1 video encoding format, developed by MPEG group in early 1990's. Too often people refer MP3 as MPEG-3, which is incorrect, because such format doesn't even exist.
MPEG-1 Audio Layer III (MP3) is a method to store good quality audio into small files by using psychoacoustics in order to get rid of the data from the audio that most of the humans can't hear.
MP3's bitrates vary from 8kbps (that is 8 kilobits per second, not kilobytes) to 320kbps. When MP3 phenomenom began in 1996, most of the audio files were encoded using 128kbps bitrate, which is still the most popular bitrate in the world -- although most of the people agree that by using slightly higher bitrates, like 192kbps or 256kbps, the audio quality can be compared with the CD quality.