If you are not sure what this is all about, reference to this post, please, which hopefully explains why the following sounds familiar.
The third chapter is a rather lengthy one. Which is interesting (pronounced in a very GladOS way), because I'm going to shorten it considerably. It has a lot of elvish history ... which seems rather pointless to me at this time.
Anyway, the gods lived happily in their newly built god-city on the edge of the world (not literally, it's a round world, but on the edge of the part that matters). In the north, Melkor built his army inside an underground fortress (made from creepy black stone, with creepy designs on the corridor walls, I am sure). And because the humans and elves were not really running around yet, and the dwarves were told to go back to sleep, and Melkor had a lot of imagination, he invented lots of monsters and sent them out to play in the forest.
A monster playground, that forest was. Complete with swings and see-saws and everything.
And he also invented his most fearsome monster of them all. The balrogs. Now those are like a being made from shadow, with a heart of fire and a whip made of flame. Very scary. And dangerous. And really really big, too.
He also built a second fortress (possibly underground, it's not really stated) and gave it to one of his commanders. I am loath to use names - as you may have noticed - but this is one that'll actually be around for a while. The commander of Angband fortress was called Sauron.
The gods decided to not actually decide anything and instead went on watching what was going on and sitting in their city. There were different voices among them, ranging from "Oh no, we'll wait and see" (Lady of Starlight) to "Lets hit him in the face - repeatedly - hard!" (Lord Fisticuffs, obviously). In the end they decided that it would only be fair towards the elves and humans if they didn't have to enter into a world full of monsters.
So they made some new stars [*] (Lady of Starlight) and put them where the elves could use them to navigate and actually see something (remember: sun and moon have not been made yet - although this technically is only explained later) and then went to war with Melkor.
The elves woke up and found a ginormous war raging in the north, except that they had just been born and had no idea what a war was. They just saw lightning and earthquakes and decided not to go there on their first holidays.
After the war was over (and Melkor bound in chains for three ages [which is a long time, seeing as the age of the elves counts as one and the humans as another and they are not gone yet in the later stories]) the gods wanted to bring the elves to safety. So they invited them to their city.
But the elves mostly wanted to run away from the gods, not knowing them from monsters (which doesn't say too much about the beauty of the gods messengers, really). In the end, the gods only managed to talk the three elvish kings into visiting and when those came back to their people, they said "Ah yup. It's nice there. We should all go".
Most of the elves actually went to see the gods. They are given about a zillion names in the Silmarillion, but in the end they all leave Middle Earth and go sit in the city of the gods. Except for a few. Some get captured by Melkor (probably before he is chained for three ages, to be fair) and turned into orcs. Some run off into the forest and become masters of healing herbs (and possibly smokable herbs, too). Some live near the water, because they want to play, not sit nicely at the table with the gods at a formal dinner (seriously. I'm not making this up!).
[*] Just so you can appreciate what I'm skipping here, let me quote one of the star-naming sentences:
"She took the silver dews from the vats of Telperion, and therewith she made new stars and brighter against the coming of the Firstborn; wherefor she whose name out of the deeps of time and the labours of Eä was Tintalle, the Kindler, was called after by the Elves Elentári, Queen of the Stars. Carnil and Luinil, Nénar and Lumbar, Alcarinque and Elemmíre she wrought in that time, and many other of the ancient stars she gathered together and set as signs in the heavens of Arda: Wilwarin, Telumendil, Soronúme, and Anarríma; and Menelmacar with his shining belt, that forbodes the Last Battle that shall be at the end of days."
Taken from: J.R.R Tolkien, The Silmarillion, Harper Collins Publishers, 1994, p. 55f.