You'll need to also download and install the Lame encoder. This is used when Audacity is asked to "Export Selected" to MP3.
I'll bypass the steps involved in downloading and installing Audacity and Lame, but if you need a walk-through on that, please see the article "Create Ringtones from Music You Already Own" here on Bright Hub and then come back to this article.
Once you have Lame and Audacity installed, it's time to take care of one setting. By default, Audacity listens to (and thus records) from the output of the Microsoft sound mapper. Depending on what you have running on your PC, this can include all sorts of interruptions like Windows sounds, Skype calls, and various pings and bongs. Since we don't want all that ruining our recording, there are a couple of proactive steps we can make.
First, start Audacity and select Edit → Preferences. On the right side, click "Microsoft Sound Mapper - Input" and change that to "Line In." (On my PC, it's labeled "MME: Line In (Realtek High Definition).") It's fine to leave the Playback device set to the sound mapper - that lets you hear the output while it's being recorded.