When you shoot a picture, the camera processes the picture data based on the white balance and other settings. Then, as its last step before transferring the photo to the memory card, the camera saves the picture into the file format you've selected. The file format you choose can impact the clarity of the photo.
A number of digital cameras offer both TIFF (or RAW) and JPEG settings:
TIFF or RAW: This file format is uncompressed. Choosing TIFF means that you're always assured of getting all the image quality captured and processed by the camera. But TIFF files can be quite large, which means that only a few will fit onto a memory card. They can also take a while to be written to the card, which, with some cameras, means it might be a few seconds before you can take another picture.
JPEG: This file format is compressed, which means that the picture information is squeezed to a smaller size before it's stored on the memory card. Though this compression does not alter the photo's resolution, it does come at the expense of a slight loss of detail and clarity in the photo. Typically, a camera will offer several JPEG settings, each offering progressively more compression (which translates into being able to store more photos on the memory card), with a commensurate drop in image quality.
The file format you choose doesn't affect the resolution of the photo, but if you choose a JPEG setting that compresses the photo heavily, the detail in the photo may be irretrievably damaged. This type of damage is caused by introducing what are know as artefacts, and often appears as a pattern of large, square blocks sprinkled through the picture. Introducing artefacts limits your ability to make a large print from the photo, even though the resolution of the photo hasn't been changed by the JPEG compression.
It would seem that shooting on the TIFF setting, if your camera offers it, is the most sensible way to eek out every ounce of quality from a digital camera. While this is true, it isn't the whole story. That's because shooting TIFF (instead of JPEG) means that you need to have lots of memory cards to shoot with, a faster memory card reader (forget "tethering", or connecting the camera directly to the computer if you're shooting TIFF), a larger hard drive to store the large files and more blank CD's since not as many TIFF files can fit on a CD as JPEG files. TIFF's can quickly become impractical.
Fortunately, the highest-quality, lowest-compression JPEG setting (often called FINE) on most cameras offers fractionally less quality than TIFF, but without the headaches of really large photo files. In fact, few photographers ever notice the difference between a best-quality JPEG and TIFF, even though the JPEG will be six to eight times smaller when stored on the card. The same can't be said of the lower-quality JPEG settings-clarity and detail can drop off fast.
To maximize both the resolution and clarity of your photos, while not bogging down the camera and limiting its usefulness, set your camera on its highest resolution and best-quality JPEG settings.