Transformers have the ability to transform voltage and current to higher or lower levels. They do NOT create energy out of nothing, and therefore when voltage is stepped up then current is stepped down, and vice versa. One of the most important things to remember about the transformer is that the power flowing from the transformer cannot exceed the incoming power.
The basic theory behind a transformer is that an AC (or fluctuating current) is supplied to the primary coil, which induces a constantly changing magnetic flux. This magnetic flux threads the secondary coil, producing a fluctuating current, that has been stepped up or down depending on the ratio of number of turns (or windings) in the primary and secondary coil. The current supplied must be an alternating current, as a DC current will not work. To understand why a DC current won't work, you must understand what electromagnetic induction is. According to this principle, a fluctuating electrical field creates achanging magnetic field, which creates a fluctuating electrical field, etc, and a transformer requires a constantly changing current to produce a constantly changing magnetic field. So then if a DC current is sent through a transformer, it would stop shortly after it is induced in the second coil. This leads to one of the many uses of a transformer, to isolate an alternating current from a direct current (DC).
Some applications of the transformer include:
Power Coversion (used to reduce power line voltage to a usable level)
High-voltage (for automotive ignition or utility company transformers)
Audio (used to match the impedance of an amplifier to that of a microphone or speaker)
The Turns Ratio - The ratio of primary to secondary turns determines a transformer's voltage ratio:
1:1 Ratio. The primary and secondary turns are the same. Normally called an isolation transformer.
Step Up. The primary turns are less than the secondary turns. This steps up the voltage which is sent into the transformer.
Step Down. The primary turns are more than the secondary turns. This steps up the current (steps down the voltage) which is sent into the transformer.
To calculate exactly what the ratio is, the formula "Vp/Vs = np/ns ~=~ Is/Ip" where V is voltage, n is turns, I is current, p is primary and s is secondary. This formula shows you that the current is only approximately equal to the reciprocal of the turns whilst the voltage is normally exactly equal. It also shows that the ratio of the turns is equal to the ratio of the voltage in the secondary and primary coils.
Transformers, just like any electrical component, are not 100% efficient. In fact, at best they are 99% efficient and may go down to around 80% efficiency. They give off some waste energy (such as heat). This wastage can be shown by the formula power loss = I^2 R, where I is current and R is resistance. From this it can be seen that stepping up current will waste a lot more energy rather than stepping up voltage thus making it highly suitable for the transmission of electrical energy from power stations to urban cities.
Bibliography -
Teach Yourself Electricity and Electronics - Fourth Edition by Stan Gibilisco
Getting Started in Electronics by Forrest M. Mims III
http://en.wikipedia.org/wiki/Transformer - 28/2/07