A magnitude comparator is a digital circuit that compares the values of two binary numbers and outputs whether the first number is greater than, less than, or equal to the second number. It has three output terminals for these comparisons. A 1-bit magnitude comparator uses AND gates to compare single bits and produce a truth table with the three possible outputs. A 2-bit magnitude comparator extends this to compare 2-bit binary numbers, using the outputs of multiple 1-bit comparators and additional logic gates to determine the relationship between the two numbers.