When you breathe in, your diaphragm - the muscle at the base of your lungs, contracts. This expands your chest cavity, lowering the air pressure of the cavity below the air pressure outside, and inflating the lungs. You can see this same principle at work in this 'homemade lung'. When you pull on the diaphragm balloon, it lowers the air pressure in the bottle. This pulls in air from outside the bottle, allowing the balloon at the top - the lung - to inflate.