Flip the Ring/Silent switch to change between ring and silent modes.

Ring/Silent switchWhen set to ring mode, iPhone plays all sounds. When set to silent mode, iPhone doesn’t ring or sound any alerts or sound effects. Alarms set using Clock do sound, however. By default, when you get a call, iPhone vibrates whether it’s set to ring or in silent mode. If iPhone is set to ring mode, you can silence a call by pressing the Sleep/Wake button or one of the volume buttons once. Press a second time to send the call to voicemail.

http://www.apple.com/iphone/tips/