Dns is a system that simply resolves domains to their servers or IP addresses. You can say it vital part of the website hosting to run the website hosting smoothly.
You need to setup DNS service on your system on which you have the dedicated IP address. DNS service comes with windows server operating systems by default and in Linux you get bind package for DNS management. You need to configure DNS zone using DNS service and A record as well as SOA ( Start of Authority ) records should be added in the zone to make your domain name resolve from that particular machine.
More details about DNS can be obtained at :- http:// en.wikipedia.org/wiki/Domain_name_system
Let me know if you need some more knowledge about DNS. I'll PM you with my MSN address so that we can have chat conversation.