Imagine you need to sell a t-shirt. This t-shirt comes in different sizes and colors. Each combination of size and color has its own SKU (stock keeping unit), so you know which color and size the customer has purchased and you can track exactly how many of each combination you have in stock.
Color and size are product attributes. Blue and small are product attribute options, belonging to the mentioned attributes. The combination of attribute options (with a SKU and a price) is called a product variation. These variations are grouped inside a product.