Now if we notice along our bronchio we also have these regions shown by red. So this portion, this portion, this portion, and that is our smooth muscle that extends around our bronchiol and it is capable of contracting and dilating that bronchiole as needed. Now notice we have many of these individual tiny balloon like structures shown by number one and those are our alveoli. That is where gas exchange actually takes place. So essentially this space, number seven, the alveolar sax space, connects directly to the space within each one of these alveoli and that is known as the alveolar space. So if we examine each one of these alveoli, we basically get the following diagram.