Disability and Disabled are both words that generally describe functional limitations that affect one or more of the major life activities, including walking, lifting, learning, breathing, etc.
A disability is broadly defined as a condition or function judged to be significantly impaired relative to the usual standard of an individual or group. The term is used to refer to individual functioning, including physical impairment, sensory impairment, cognitive impairment, intellectual impairment mental illness, and various types of chronic disease.
Different laws and countries define disability differently.
Conventional definitions of "disabled" and "disability" stem from social service programs and benefits programs such as Social Security. These definitions, dating back many years (See Deborah Stone's book "The Disabled State ") uniformly used the term "disabled" or "disability" to mean "unable" - to work, to handle gainful employment, etc. If you look up definitions of "disabled" you'll find these kinds of definitions.
"Disability" and "Disabled" are terms that are undergoing change due to the disability rights movement both in the U.S. and U.K. To a lesser extent this is occurring worldwide. To most people today the term "disabled" still means just that, and, more broadly, means "unable to perform" this or that physical or mental function.
Even more broadly, a large group of physical or mental conditions are considered to be "disabilities" - things people have also called "afflictions" or "impairments" or "injuries" or "diseases."
Beginning in the 1970s, people labeled as "disabled" (Either because they fell under the Social Security definition or because they had some sort of injury or condition considered a "disability") began seeking changes in society that would allow them to have a better life. Since the 1980s, this effort has generally been termed "disability rights" advocacy or "disability rights activism." The term is "disability rights" - not "disabled rights" or "handicapped rights" simply because historically and politically that's the term that the activists themselves have come to call it. So the correct term is "Disability Rights."
Calling a person disabled - not THE disabled but a disabled person is almost always considered correct. This is the primary term used in the UK and amongst academics and activists in the United States.
Another term that grew in popularity during the first part of the 20th Century was "handicapped." The conventional wisdom has it that this was a term first used by the social service field; it's intent was to focus on social conditions: to say that an individual was "handicapped" by such and such - by paralysis, by being kept out of buildings, whatever. (It is not true, as some have said, that the term comes from "cap in hand", see snopes.com for a discussion of this). The term comes from sports: handicapping mean assigned some extra burden or weight.
Back to the birth of today's disability rights movement: budding activists did not like having been "defined" by the social service system basically rebelled against the term "handicapped" SIMPLY BECAUSE IT HAD BEEN ASSIGNED TO THEM BY OTHERS - and, in choosing a new term, chose "disabled." Anecdote has it that Judy Heumann led the change, arguing that "others handicap us but we are disabled people" - this is not in any way an exact quote but it carries the flavor of Heumann's thinking.
So, activists in the U.S began using "disabled." As in "disabled person."
Then a movement came along to change the wording to "people first language" - so, it was argued, use the term "people with disabilities." Britain's disability rights theorists and disability studies leaders reject that, and stick with "disabled person." Currently in the U.S.A. activists seem divided. We must keep in mind that the disability rights movement and its thinking is almost unknown outside the movement itself! - People First Language: An Oppositional Viewpoint.
Many people still use "handicapped" or "crippled" or "afflicted."
None of these terms is looked upon with favor by anyone in the organized U.S. or U.K. disability rights movement. "Handicapped" is truly detested in U.K. circles. Handicapped is offensive - it's a limiting term. Challenged is just sugar coating, as is impaired or any other word that attempts to "dance around" the subject matter. The idea of being challenged emerged about 10 years ago and is condescending. People with disabilities are not challenged - you are challenged to play chess and one of you wins - disabilities you live with - you struggle - you face them head on - there is only learning to accept and move onward.
They are not dismissing the fact that they are disabled - but they are dismissing it as a negative experience. I am autistic. I am an aspie. I am deaf. I am blind. I am disabled.
There are some words, three especially, that have been rejected nearly universally - retardation and any derivative like retard, tard, retarded; spastic and spaz; Cripple and crip. Just like the N word is used between peers - spaz and crip are used between close friends. Retard is not used by anyone to describe themselves.