DLL and LIB files - what and why?
Another aspect is security (obfuscation). Once a piece of code is extracted from the main application and put in a "separated" Dynamic-Link Library, it is easier to attack, analyse (reverse-engineer) the code, since it has been isolated. When the same piece of code is kept in a LIB Library, it is part of the compiled (linked) target application, and this thus harder to isolate (differentiate) that piece of code from the rest of the target binaries.
There are static libraries (LIB) and dynamic libraries (DLL) - but note that .LIB files can be either static libraries (containing object files) or import libraries (containing symbols to allow the linker to link to a DLL).
Libraries are used because you may have code that you want to use in many programs. For example if you write a function that counts the number of characters in a string, that function will be useful in lots of programs. Once you get that function working correctly you don't want to have to recompile the code every time you use it, so you put the executable code for that function in a library, and the linker can extract and insert the compiled code into your program. Static libraries are sometimes called 'archives' for this reason.
Dynamic libraries take this one step further. It seems wasteful to have multiple copies of the library functions taking up space in each of the programs. Why can't they all share one copy of the function? This is what dynamic libraries are for. Rather than building the library code into your program when it is compiled, it can be run by mapping it into your program as it is loaded into memory. Multiple programs running at the same time that use the same functions can all share one copy, saving memory. In fact, you can load dynamic libraries only as needed, depending on the path through your code. No point in having the printer routines taking up memory if you aren't doing any printing. On the other hand, this means you have to have a copy of the dynamic library installed on every machine your program runs on. This creates its own set of problems.
As an example, almost every program written in 'C' will need functions from a library called the 'C runtime library, though few programs will need all of the functions. The C runtime comes in both static and dynamic versions, so you can determine which version your program uses depending on particular needs.
A DLL is a library of functions that are shared among other executable programs. Just look in your windows/system32 directory and you will find dozens of them. When your program creates a DLL it also normally creates a lib file so that the application *.exe program can resolve symbols that are declared in the DLL.
A .lib is a library of functions that are statically linked to a program -- they are NOT shared by other programs. Each program that links with a *.lib file has all the code in that file. If you have two programs A.exe and B.exe that link with C.lib then each A and B will both contain the code in C.lib.
How you create DLLs and libs depend on the compiler you use. Each compiler does it differently.
One important reason for creating a DLL/LIB rather than just compiling the code into an executable is reuse and relocation. The average Java or .NET application (for example) will most likely use several 3rd party (or framework) libraries. It is much easier and faster to just compile against a pre-built library, rather than having to compile all of the 3rd party code into your application. Compiling your code into libraries also encourages good design practices, e.g. designing your classes to be used in different types of applications.