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Firstly, a definition. 'Dynamic range' means the difference between the loud parts and the quiet parts of a signal. Now that we know this, lets look at compression...
Compression has a number of potential applications...
Let's look at the single signal first. Typically this could the vocal in a multitrack recording that also consists of a number of instruments.
In all probability, there will be some parts of the recording where the vocal is too loud and other parts where it is too quiet. There will not be one fader level that is satisfactory for the vocal in all parts of the song.
To correct this, a compressor can be used to reduce the dynamic range of the vocal. Now, it is quite likely that one fader position will be adequate for the whole of the vocal. This is often done, but it is also often thought that it is better simply to 'ride' (i.e. move as necessary) the fader. However this type of compression is perfectly acceptable for broadcasting to take some of the burden from the engineer who has a lot of other things to think about at the same time.
It isn't usually necessary to reduce the dynamic range of a stereo mix for CD release. Most modern styles of music naturally have a fairly narrow dynamic range. However it is often desirable to do so because the mix can sound subjectively louder as a result.
In broadcasting, particularly of orchestral music that has a wide dynamic range, it is essential to apply compression. Many listeners will have a far from perfect listening environment and quiet sections would be almost inaudible behind the natural background noise.
Probably the most significant use of the compressor in music recording is to provide subjective enhancement, which doesn't overtly seem to have much to do with the dynamic range. Even a signal with a near-zero dynamic range can benefit from the subjective enhancement of compression. This can also apply to a stereo mix.
A compressor works by lowering high signal levels. This reduces the dynamic range. However, the overall signal level is now lower. So correct this, the whole signal is brought back up in level. (This is called 'gain make up', or 'make up gain'.) When this is done, the highest levels will be at the same level they were before, but the lower levels will be louder than they were before.