The lower airway ends at the Alveoli, where gas exchange occurs. Oxygen moves to the hemoglobin by passing through a semipermeable membrane. Where does this occur?

Within each air sac, the oxygen concentration is high, so oxygen passes or diffuses across the alveolar membrane into the pulmonary capillary. At the beginning of the pulmonary capillary, the hemoglobin in the red blood cells has carbon dioxide bound to it and very little oxygen. The oxygen binds to hemoglobin and the carbon dioxide is released. Carbon dioxide is also released from sodium bicarbonate dissolved in the blood of the pulmonary capillary. The concentration of carbon dioxide is high in the pulmonary capillary, so carbon dioxide leaves the blood and passes across the alveolar membrane into the air sac. This exchange of gases occurs rapidly (fractions of a second). The carbon dioxide then leaves the alveolus when you exhale and the oxygen-enriched blood returns to the heart. Thus, the purpose of breathing is to keep the oxygen concentration high and the carbon dioxide concentration low in the alveoli so this gas exchange can occur! Source:http://science.howstuffworks.com/environmental/life/human-biology/lung2.htm