Observable is a stream of data/events to be observed/processed.

Observer is as the name itself suggests, a consumer of the Observable stream.

Subscription is a relationship between a Observable and a Observer that is returned by Observable.subscribe() function. A subscription can be unsubscribed/terminated by invoking unsubscribe() function on the relationship itself.

Observable.create() function is an alias of Observable’s constructor function. It takes a function named subscribe as its parameter, and the subscribe function takes a subscriber as its parameter. Later you’ll see that subscriber is actually the Observer we used in subscription=Observable.subscribe(Observer).

See the source code below from RxJS github repo:

Observable.create() definition:

  // HACK: Since TypeScript inherits static properties too, we have to
  // fight against TypeScript here so Subject can have a different static create signature
  /**
   * Creates a new cold Observable by calling the Observable constructor
   * @static true
   * @owner Observable
   * @method create
   * @param {Function} subscribe? the subscriber function to be passed to the Observable constructor
   * @return {Observable} a new cold observable
   * @nocollapse
   * @deprecated use new Observable() instead
   */
  static create: Function = <T>(subscribe?: (subscriber: Subscriber<T>) => TeardownLogic) => {
    return new Observable<T>(subscribe);
  }

Observable’s constructor() definition:

 /**
   * @constructor
   * @param {Function} subscribe the function that is called when the Observable is
   * initially subscribed to. This function is given a Subscriber, to which new values
   * can be `next`ed, or an `error` method can be called to raise an error, or
   * `complete` can be called to notify of a successful completion.
   */
  constructor(subscribe?: (this: Observable<T>, subscriber: Subscriber<T>) => TeardownLogic) {
    if (subscribe) {
      this._subscribe = subscribe;
    }
  }

Observable’s subscribe() function definition:

 /**
   * Invokes an execution of an Observable and registers Observer handlers for notifications it will emit.
   *
   * <span class="informal">Use it when you have all these Observables, but still nothing is happening.</span>
   *
   * `subscribe` is not a regular operator, but a method that calls Observable's internal `subscribe` function. It
   * might be for example a function that you passed to Observable's constructor, but most of the time it is
   * a library implementation, which defines what will be emitted by an Observable, and when it be will emitted. This means
   * that calling `subscribe` is actually the moment when Observable starts its work, not when it is created, as it is often
   * the thought.
   *
   * Apart from starting the execution of an Observable, this method allows you to listen for values
   * that an Observable emits, as well as for when it completes or errors. You can achieve this in two
   * of the following ways.
   *
   * The first way is creating an object that implements {@link Observer} interface. It should have methods
   * defined by that interface, but note that it should be just a regular JavaScript object, which you can create
   * yourself in any way you want (ES6 class, classic function constructor, object literal etc.). In particular do
   * not attempt to use any RxJS implementation details to create Observers - you don't need them. Remember also
   * that your object does not have to implement all methods. If you find yourself creating a method that doesn't
   * do anything, you can simply omit it. Note however, if the `error` method is not provided, all errors will
   * be left uncaught.
   *
   * The second way is to give up on Observer object altogether and simply provide callback functions in place of its methods.
   * This means you can provide three functions as arguments to `subscribe`, where the first function is equivalent
   * of a `next` method, the second of an `error` method and the third of a `complete` method. Just as in case of Observer,
   * if you do not need to listen for something, you can omit a function, preferably by passing `undefined` or `null`,
   * since `subscribe` recognizes these functions by where they were placed in function call. When it comes
   * to `error` function, just as before, if not provided, errors emitted by an Observable will be thrown.
   *
   * Whichever style of calling `subscribe` you use, in both cases it returns a Subscription object.
   * This object allows you to call `unsubscribe` on it, which in turn will stop the work that an Observable does and will clean
   * up all resources that an Observable used. Note that cancelling a subscription will not call `complete` callback
   * provided to `subscribe` function, which is reserved for a regular completion signal that comes from an Observable.
   *
   * Remember that callbacks provided to `subscribe` are not guaranteed to be called asynchronously.
   * It is an Observable itself that decides when these functions will be called. For example {@link of}
   * by default emits all its values synchronously. Always check documentation for how given Observable
   * will behave when subscribed and if its default behavior can be modified with a `scheduler`.
   *
   * ## Example
   * ### Subscribe with an Observer
   * ```ts
   * import { of } from 'rxjs';
   *
   * const sumObserver = {
   *   sum: 0,
   *   next(value) {
   *     console.log('Adding: ' + value);
   *     this.sum = this.sum + value;
   *   },
   *   error() {
   *     // We actually could just remove this method,
   *     // since we do not really care about errors right now.
   *   },
   *   complete() {
   *     console.log('Sum equals: ' + this.sum);
   *   }
   * };
   *
   * of(1, 2, 3) // Synchronously emits 1, 2, 3 and then completes.
   *   .subscribe(sumObserver);
   *
   * // Logs:
   * // "Adding: 1"
   * // "Adding: 2"
   * // "Adding: 3"
   * // "Sum equals: 6"
   * ```
   *
   * ### Subscribe with functions
   * ```ts
   * import { of } from 'rxjs'
   *
   * let sum = 0;
   *
   * of(1, 2, 3).subscribe(
   *   value => {
   *     console.log('Adding: ' + value);
   *     sum = sum + value;
   *   },
   *   undefined,
   *   () => console.log('Sum equals: ' + sum)
   * );
   *
   * // Logs:
   * // "Adding: 1"
   * // "Adding: 2"
   * // "Adding: 3"
   * // "Sum equals: 6"
   * ```
   *
   * ### Cancel a subscription
   * ```ts
   * import { interval } from 'rxjs';
   *
   * const subscription = interval(1000).subscribe(
   *   num => console.log(num),
   *   undefined,
   *   () => {
   *     // Will not be called, even when cancelling subscription.
   *     console.log('completed!');
   *   }
   * );
   *
   * setTimeout(() => {
   *   subscription.unsubscribe();
   *   console.log('unsubscribed!');
   * }, 2500);
   *
   * // Logs:
   * // 0 after 1s
   * // 1 after 2s
   * // "unsubscribed!" after 2.5s
   * ```
   *
   * @param {Observer|Function} observerOrNext (optional) Either an observer with methods to be called,
   *  or the first of three possible handlers, which is the handler for each value emitted from the subscribed
   *  Observable.
   * @param {Function} error (optional) A handler for a terminal event resulting from an error. If no error handler is provided,
   *  the error will be thrown as unhandled.
   * @param {Function} complete (optional) A handler for a terminal event resulting from successful completion.
   * @return {ISubscription} a subscription reference to the registered handlers
   * @method subscribe
   */
  subscribe(observerOrNext?: PartialObserver<T> | ((value: T) => void),
            error?: (error: any) => void,
            complete?: () => void): Subscription {

    const { operator } = this;
    const sink = toSubscriber(observerOrNext, error, complete);

    if (operator) {
      sink.add(operator.call(sink, this.source));
    } else {
      sink.add(
        this.source || (config.useDeprecatedSynchronousErrorHandling && !sink.syncErrorThrowable) ?
        this._subscribe(sink) :
        this._trySubscribe(sink)
      );
    }

    if (config.useDeprecatedSynchronousErrorHandling) {
      if (sink.syncErrorThrowable) {
        sink.syncErrorThrowable = false;
        if (sink.syncErrorThrown) {
          throw sink.syncErrorValue;
        }
      }
    }

    return sink;
  }

Here is an example using all these functions above:

The execution result for observer1 is :

observer1.next(1): got value 1
observer1.next(2): got value 2
observer1.next(3): got value 3
observer1.complete: done

observer1.next(4) will never be executed as observer1.complete() is invoked ahead.

The execution result for observer2 is the same. And we define a subscription of Observable and observer2 here just to illustrate that multiple observers will not interfere with each other.