Graphics fall into to two main categories:

Vector graphics
Bitmap graphics
The difference between these two types is what they're made up of. Vector graphics are made up of lines and curves. Bitmap graphics are made up of little squares called pixels.

Notice that even blown up this large, it's still fairly smooth. You only see a little bit of jagginess because your monitor can only display this graphic using pixels. If you were to print it out, you'd see that it's as smooth as the same graphic at 100%.

Here's the same logo — except it's a bitmap graphic — blown up roughly the same amount. Doesn't look the same does it? You can see obvious jagginess or "stairstepping", and the text is unreadable.

That's because this is a bitmap graphic. It's composed of little squares called pixels. When you enlarge the graphic, the software must guess where to put the extra pixels necessary to make it larger. Let's zoom in even closer on these graphics.

Here's a closeup of the bar on the k in the bitmap graphic. Now you can see the pixels, close up and personal. The reason they're different colors is because of antialiasing.

Here's a closeup of the bar on the k in the vector graphic. Looks nice and smooth, doesn't it?

Here's a closeup of the bar on the k in the bitmap graphic, after it's been converted to bitmap mode. It's no longer antialiased, so you can really see the jaggies — the individual little squares, or pixels. Ugh!

Finally, let's take a look at what happens to this same graphic — in both vector and bitmap format — when it's reduced in size. This comparison is a little unfair, because we're comparing apples and oranges, so to speak. We've got to zoom in on the reduced graphic in order to see anything: this changes nothing in a vector graphic, but as we've seen before, zooming does interesting things to bitmap graphics.