Have you ever taken a wool sweater and accidently put it in the hot washer and it comes out looking like a tiny sweater made out of solid fabric?
That's the idea behind felting but you shrink it on purpose.
Bags, hats and slippers are all common things to "felt"
Here's a purse I made, from the Booga Bag pattern
. See how you can't see the detail in the stitches? When it shrinks the wool kind of fuzzes out and the stitch detail is lost as the bag shrinks in the wash.