Could someone explain to me how to do this?

I heard that one person plays something, and the other has to repeat it. But that doesn't sound too fun. It would take me at least a min to get something down by ear.
The other person usually plays something that's a little bit like what the first person played, but he tries to add things to it and make it sound better.
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Tales of Ale: http://www.talesofale.com
Rent CROSSROADS with that Ralph guy who was the Karate Kid...there is a battle a the end between him and Steve Vai...of course Ralph wins cuz its hollywood but Vai actually plays all the parts
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