The ideas in this post largely come from Nicolas Collins' excellent book 'Handmade Electronic Music', which I would highly recommend.
The 4051 eight channel multiplexer has eight individual channels, and one common channel. At any point in time, one and only one individual channel can be connected to the common channel. The result is a structure that resembles an eight input gate or eight output switch - i.e. one common point being connected to one of eight individual points.
Three pins labelled A1, A2 and A3 form an address, whereby one of the eight individual channels are selected. The LOW or HIGH state of A1, A2 and A3 determine the channel that is currently connected to the common channel.
So, for example, if A1 is LOW, A2 is HIGH and A3 is LOW, then channel 3 is connected to the common pin. If A1 is HIGH, A2 is HIGH and A3 is LOW, then channel 7 is connected to the common pin.
The connection between the common pin and an individual channel can be an analog signal - i.e. audio, complex waveforms, DC values etc, or logic state signals. This makes the 4051 very versatile.
By combining a 40106 with a 4040, the 4051 can be used to make an octave sequencer. A 40106 oscillator is used as a clock source, which is feed into pin 10 of the 4040 binary counter. The first eight outputs of the 4040 outputs are connected to the eight individual channel inputs of the 4051.
The last three outputs of the 4040 are connected to the three address pins of the 4051. Thus, the 4040 is used to generate a set of signals all one octave apart. Each octave is fed into an input on the 4051. By changing the address lines of the 4051, only one octave is heard at a time. The order of A1, A2 and A3 as well as the frequency can be adjusted for a more interesting sequence.