New words are added to the English language at a rate of about 900 words every year. The methods used for admitting new words officially is not scientific . Generally, the word must be used by people in positions of influence or people who get a lot of media coverage. It also needs to be widespread, (here's where the Media, especially TV and the Internet come in) and in use for a certain period of time (how long is arbitrary) The criteria used for admittance is far from strict, it obeys more to a hunch that a word everyone's using "is here to stay".
Aside from the most common ways of creating new words, such as
joining two existing words, (dirty dancing), adding a prefix or a suffix (on-growing) or "blending" words (breakfast+lunch=brunch), you can also re-create, using an existing word in a different way or giving it a different meaning. This includes using a noun as a verb (to doorstep someone) or an adjective as a noun.
Or else you can shorten long words and when this shorter version is used widely enough, it becomes a word in its own right (porn instead of pornography) just like Acronyms do. (AIDS)
You can also introduce words from foreign languages, usually to describe something we haven't got a word for in English, such as siesta, which is slightly longer than a nap or fuselage introduced in aviation language from the French.
And last, but not least, you can come up with completely new or invented words.
I personally love the latter (though I don't recommend their use when sitting for an exam. Not before they are included in the dictionary, anyway.) But don't be afraid to use them in speech. Provided a word is descriptive enough and makes sense (some don't even have to make too much sense - the word googol, that means 1 with 100 noughts after, was invented by a mathematician's young nephew), go ahead and say it! Who knows? Your word might end up in the dictionary.
What happens when words are no longer used? Small abridged dictionaries might drop them, but you'll still find them in the complete versions. They are always there, ready for revival.
One of the most appealing features of the English language is, I believe, precisely this flexibility with words. Any lover of Scrabble will understand what I mean. I had a Dutch friend who refused to remove the y she had conveniently placed at the end of "further". What's wrong with saying "I live a little furthery"?, she asked. It stresses the "little further" a little further still. Soon it became the standing joke in our group of friends. Never made it to the Oxford dictionary, I'm afraid.
Few purists are against this practice that has helped to make English what it is.
Grammar, though, is another matter altogether. Far less flexible and yet..."You can be a little ungrammatical if you come from the right part of the country." Robert Frost. But we'll talk about that some other time.
More interesting facts on linguistics in http://itotd.com/articles/549/portmanteau/
NOTE:The image above is not mine, it comes from a website called something like "abeautifulrevolution" but I was unable to find it. My compliments to the person who created it and my apology if I am in any way infringing his copyright.