In windows 7 and 8 there is an option in folder or file's advanced security tab called enable or disable inheritance.
What will happen if I enable or disable this option? What is its default value for a file or folder?
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The filesystem is made of objects, mostly files, folders and drives.
Like each file, each folder and also a drive at the root of the file system does have its own set of permissions.
But to make things easier, it is a common configuration that most of the folders do just inherit the permissions from the folder they live in, and folders at the root of a filesystem inherit from the drive (you could say 'the drive letter').
An example: The folder D:\backup\monday\ could inherit permissions from D:\backup. And the folder D:\backup\ could inherit its permissions from drive D:
But it is not very obvious what the button that you marked in the screenshot refers to. It is actually quite simple, if you only remember 2 things:
1) The inheritance setting that you see refers to the current folder whos properties window you have just open.
2) The inheritance setting means that this folder inherits permissions from above - or not.
From 'above' means from any of the parent folders or the drive letter at the root of all the folders. If the folder is at the root of a drive it means inheriting from the drive or not.
When you see a button "Disable inheritance" it means inheritance from above is currently enabled for this folder.
When you see a button "Enable inheritance" it means inheritance from above is currently disabled for this folder.
You can also look at the entries in the table that you see above the button. There is a column named "Inherited from" which gives further information about the inheritance.