Concept:
The lungs are respiratory organs responsible for exchange of gases.
Step 1: Understanding alveoli.
Alveoli are tiny air sacs present at the end of bronchioles.
Step 2: Function of alveoli.
Gas exchange occurs through the thin walls of alveoli. Oxygen enters the blood and carbon dioxide leaves the blood.
\[
O_2 \rightarrow \text{blood}, \qquad CO_2 \rightarrow \text{alveoli}
\]
Step 3: Why alveolus is functional unit.
Since the main function of lungs is gaseous exchange and alveoli perform this function, alveolus is the functional unit of lungs.
Step 4: Checking other options.
Bronchus and trachea are air passages.
Pleura is the covering of lungs.
Alveolus is the site of gas exchange.
\[
\boxed{\text{Alveolus}}
\]