In general, a fine-grained description of a system is a detailed description of its microscopic behaviour. A coarse-grained description is one in which some of this fine detail has been smoothed over [1].
Coarse-graining is at the core of the second law of thermodynamics, which states that the entropy of the universe is increasing. It is important to recognize that a critical property of a coarse-grained description is that it is “true” to the system, meaning that it is a reduction or simplification of the actual microscopic details. It involves integrating over component behaviour. A wonderful intuitive description can be found in this answer.
Wikipedia says:
The exactly evolving entropy, which does not increase, is known as
fine-grained entropy. The blurred entropy is known as coarse-grained
entropy. Leonard Susskind in this lecture analogizes this distinction to the notion of
the volume of a fibrous ball of cotton: On one hand the volume of
the fibres themselves is constant, but in another sense, there is a
larger coarse-grained volume, corresponding to the outline of the
ball.
Mathematically speaking, fine-grained entropy $s$ is defined as the functional $$s = I[\rho] = \int \rho \ln \rho \ \mathbb{d}q \ \mathbb{d}p$$ over the whole space. It is also known as Gibbs' entropy or information entropy.
By Liouville's theorem, $\dfrac{d\rho}{dt} = 0$ and we find that $s$ remains constant in time, $\dfrac{ds}{dt} = 0$
Following Gibbs’ original idea, a fine-grained distribution $\rho$ can be coarse-grained by performing a local average over each cell (or partition) in phase space. Coarse-grained entropy $\bar{s}$ is defined as the functional $$\bar{s} = I[\bar{\rho}] = \int \bar{\rho} \ln \bar{\rho} \ \mathbb{d}q \ \mathbb{d}p$$ where $$\bar\rho = \sum_{C} p_{\rho}(C)\rho_{C}(\mathbf{x})$$ with $\sum_{C}p_{\rho}(C) = 1$ and each $p_C$ gives the probability of the system in Boltzmann state $C$. The following relation holds too: $$ p_{\rho}(C) = \int_{C}\rho(\mathbf{x}) \mathbb{d}q \ \mathbb{d}p = \int_{C}\bar{\rho}(\mathbf{x}) \mathbb{d}q \ \mathbb{d}p = p_\bar{\rho}(C) $$
The macroscopic properties of a fine-grained distribution $\rho$ are completely encoded in its coarse-grained version $\bar{\rho}$. As was established by Gibbs (also can be seen as an application of Jensen inequality) we find $$s \leq \bar{s}$$
A stronger result is that if the measure of the phase space is infinite while the measure of each partitioned cell is bounded then $\text{max}(\bar{s}) = + \infty$ as proved here.