A transformer is a device that converts alternating voltages from one level to another. It works on the principle of mutual induction between two coils linked by a magnetic field. A step-up transformer increases voltage and decreases current, while a step-down transformer decreases voltage and increases current. Real transformers are not 100% efficient due to energy losses from copper windings, flux leakage, hysteresis in the iron core, and eddy currents. However, transformers remain essential for power transmission and applications requiring different voltage levels.