It is also called a Private Automatic Branch Exchange (PABX) The PBX is an on-premises telephone exchange (a digital service) that supports digital data services as well as analog telephone service and provides dial tone to the telephones connected to it. It serves as a point of entry into the Public Switched Telephone Network (see PSTN).
PBX systems pool outside line resources and also provide switching of in-house calls. Internal calls are routed through the PBX and never go through the local exchange, making it easier to call someone within a PBX. When you dial a 3-4 digit extension, it is running on a PBX. PBX is much less expensive than connecting every phone within a company to an external line. PBX has the ability to handle thousands of users on a single system and provide centralized support such as voice mail.