Digital signals have two levels (often 0 and 5 volts). These levels represent zero and one in the binary number system.
The smallest element of a digital signal is the single bit. This can be a zero or a one.
Digital systems often work with groups of bits. For example a group of eight bits is known as a byte.
Half a byte is known as a nybble - really!
Digital signals are (possibly without exception) man made and found in information processing devices such as computers, phones, digital music players and control systems. Digital signals on an oscilloscope appear as square waves.

Analogue signals have an infinite range of values. They occur in nature and vary in a smooth way. On an oscilloscope, analogue signals are smoothly varying. Sudden changes are uncommon but there are exceptions such as current pulses in thunder storms. Analogue quantities include temperature, pressure, water level, humidity, altitude, distance, speed and power. There are many more.
If a computer or other data processing device needs to process a signal measured from nature, the analogue signal from nature will need to be converted into a digital signal consisting of binary numbers. For example recording music to the CD format requires the sound to be converted into digital data. An A to D converter is used.
To play back CD music, the digital data on the CD must be converted back to an analogue signal. This is a D to A converter.
Analogue data is easily damaged by noise. Digital data is usually unaffected by noise. It is possible to convert analogue to digital and back again with superb accuracy. Digital noise imunity and mathematical error correction techniques explain why digital systems are usually much better than their analogue counterparts.
This is a measure of how good the digital system is. If the binary (digital) value changes by one, by how much will the analogue system change?
These diagrams show how a signal is damaged by being converted from analogue to low resolution digital and back again. To improve the resolution, more bits must be used. This makes the steps in the staircase in the diagram below smaller and the reconstructed wave is more accurate.
Original

Reconstruction - This is very poor because it is only a three bit system. 8 bit systems are adequate and 16 bit systems are excellent.

Example 1: A four bit digital system is connected to a DAC that gives an output between 0 and 15 volts depending on the binary number being converted. The resolution is one volt. This is an easy example because the binary numbers go from 0000 to 1111. This is from 0 to 15 in decimal. The DAC output is also a voltage between 0 and 15 volts. The output goes in one volt steps.
Example 2: A CD player uses 16 bit samples. If the maximum CD player output is from -1 to +1 volts (1 volt peak to peak) what is the resolution?