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Audacity's Compressor effect reduces "dynamic range" by making the loud sections quieter, then optionally amplifies the compressed audio to be as loud as possible without clipping. This increases the perceived overall loudness of the audio.
Related article(s):

The terms of the Compressor effect are as follows:

  • Threshold - the volume level at which compression starts to be applied. The further right the slider, the louder the input has to be before compression is applied.
  • Ratio - if the level is above the threshold, how much it will be reduced. For example, a 3:1 ratio implies that a passage in the original audio that became 3 dB louder would only become 1 dB louder in the compressed result. The further the slider is to right, the stronger is the compression applied.
  • Attack time - the amount of time the compressor waits to respond after the Threshold is reached
  • Decay Time: - how soon the compressor starts to increase the volume level back to normal after the level drops below the Threshold
  • Normalize to 0 dB after compressing - if this is checked, then after compression the audio will be amplified to the maximum amount possible without adding distortion

Further reading

There are some good (but not too technical) explanations of compression here:

More advanced:

An alternative Free Compressor

  • Chris's dynamic compressor by Chris Capel was a popular Nyquist plug-in that tried to even out abrupt changes of volume by employing "lookahead" (this attempts to anticipate volume changes by starting to apply compression before the volume rises to the threshold level). There were also options to soften the softer audio and invert loudness. See instructions for Nyquist plug-in installation.