How index work in oracle?
If a heap-organized table has no indexes, then the database must perform a full table scan to find a value.

Following link provides information on indexes in detail
http://docs.oracle.com/cd/E11882_01/server.112/e25789/indexiot.htm#CNCPT721
here you will find details of various kinds of indexes Oracle supports

If you have query like

Find a,b,c where emp_name = 'Adam Smith'


In case you have an index on column emp_name than instead of searching the entire table the data can be fetched directly. In case the column is not unique multiple rows that have emp_name Adam Smith will be fetched.

On large tables Indexes can improve the performance of queries even 100 times.

Performance improvement depends on the selectivity. In million values in a column if 100% are unique you get maximum selectivity and performance improvement is maximum, but if you have only 2 different values of a column say like 0 or 1 or yes or no you may get some improvement or no improvement or even degradation. 

There are different types of Indexes like B-Tree, Bitmap, Bitmap join etc.
Most commonly used indexes are B-Tree.

B-tree is a tree data structure that keeps data sorted and allows searches, sequential access, insertions, and deletions in logarithmic time. Indexes are stored as B-Tree on disk

You can find details of B-Tree indexes on the following link
http://en.wikipedia.org/wiki/B_tree_indexing