MP4 files (MPEG-4 Part 14) are multimedia files. MP4 is a container format that can store video, audio and subtitle data (as well as more depending on content). Since stores like iTunes uses this container format, and it is used with iPod and PlayStation Portable (PSP), MP4 files have become more common.
MPEG-4 Part 14 or MP4, formally ISO/IEC 14496-14:2003, is a multimedia container format standard specified as a part of MPEG-4. It is most commonly used to store digital video and digital audio streams, especially those defined by MPEG, but can also be used to store other data such as subtitles and still images. Like most modern container formats, MPEG-4 Part 14 allows streaming over the Internet. A separate hint track is used to include streaming information in the file. The only official filename extension for MPEG-4 Part 14 files is .mp4.
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MP3 is a digital music format which allows CD tracks to be reduced to around a tenth of their normal size without a significant loss of quality. MP3 gets rid of a lot of the information recorded in a song that our ears are not able to hear and then uses complex algorithms to reduce the file size. This then enables you to get hundreds of songs on to a CD and it also has opened up a new market over the internet - the download market as download times have been significantly reduced.
The MP3 format is a lossy format. That means that an MP3 file does not contain 100% of the original audio information. Instead, MP3 files use perceptual coding. In other words, that means it removes the information that your ear doesn't notice thereby making the file smaller. The reason lossy formats are used over raw is that raw audio files are too large to travel over the internet at any great speed. By using lossy formats it enables even dial up users to download mp3 files at a reasonable speed. Raw file formats generally require 176,000 bytes per second compared to a lossy format which requires 17,600. The difference is massive and so are the download times.