Phong shading is a technique used in computer graphics to simulate the way light interacts with surfaces. It calculates the color of a pixel based on the angle between the light source, the viewer, and the surface normal. This method creates a smooth transition of colors and highlights, making objects appear more three-dimensional. The process involves three components: ambient, diffuse, and specular reflection. Ambient light provides a base color, diffuse reflection simulates light scattering across rough surfaces, and specular reflection creates shiny highlights. Together, these elements enhance realism in rendered images, making them visually appealing.