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.