Non-invasive in vivo medical ultrasound imaging using contrast agents requires further physical understanding of ultrasound wave propagation phenomenon in tissue and scattering from microbubbles. Cumulative nonlinearity exhibited by wave motion in tissue and local nonlinearity by microbubble dynamics are strongly influence the imaging technique and microbubble detectability. The wave propagation in tissue is studied using KZK-type parabolic evolution equation. This model considers ultrasound beam diffraction, attenuation, and tissue nonlinearity. Pressure-wave scattering from microbubbles, seeded in the blood stream, is modeled using Rayleigh-Plesset-type equation. The continuity and the radial-momentum equations of encapsulated microbubbles are employed to account for the lipid layer surrounding the microbubble. Numerical results show the effects of tissue and microbubble nonlinearities on pressure-wave propagation and scattering. These nonlinearities have a strong influence on the waveform distortion and harmonic generation. Results also show that microbubbles have stronger nonlinearity than that of tissue, and thus improves signal-to-noise ratio.