As the others mentioned.. But basically an observer is a so called BUD switch. BUD stands for Block Update Detector. You can read more about those here, so basically... An observer put a construction like this into one single block
2) How do they work?
This has also been mentioned above, but there's one thing I'd like to add: if you want to make an observer signal trigger something such as a redstone torch then you'll need to delay it. Using a repeater set to two ticks will do the job, otherwise the torch won't respond at all.
3) I thought command blocks were boss xD (but I guess not in this sense since these are in survival mode)
That's what I like about all this: you can easily use them together
How do they work? I mean, these things-- I don't even know where to start with this. I'd thought it was a FREAKIN' DISPENSER the first time I saw it. xD But then I realized the strange truth. Aliens made it to Minecraft through the form of these blocks! Ahhh that explains everything.