Alveoli are the tiny air sacs at the ends of the bronchioles where gas exchange happens. According to the U.S. National Heart, Lung, and Blood Institute (NHLBI), when you inhale, air travels down the airways into roughly 150 million alveoli; oxygen then moves across their thin walls into surrounding capillaries, while carbon dioxide moves from the blood into the alveoli to be exhaled.
Each alveolus is lined with elastic tissue and coated with surfactant that helps the sacs expand and keeps them from collapsing when you breathe out. A dense mesh of capillaries around the alveoli makes that oxygen–carbon dioxide swap efficient enough to supply the body and remove waste gas.
Source: How the Lungs Work — The Respiratory System (NHLBI / NIH)