Early film cameras were large boxes that produced negatives the same size as the finished print. It was the only way they could achieve pin sharp detail. As the technology improved, so film sizes could be reduced.
The most significant breakthrough came when Ernst Leitz introduced the first of their legendary cameras that used 35mm movie film. Although newspaper photographers would continue to use the large format twin lens Rolleiflex, roving cameramen took to the compact format of the new cameras.
Even these cameras were not compact enough for the public though; so Kodak introduced the 110 format in 1972. Their previous cartridge films - the 126 - was in fact 35mm film in an easy to load format. The new film was closer to 16mm film in size.
Although it was originally intended for cheap point and shoot cameras, it found favour with companies like Canon and Rollei who produced high quality sub minature cameras using this film.
In order to get the same quality results from these smaller formats, film manufacturers had to produce film with an ultra fine grain. At the same time, lenses manufacturers had to come up with higher definition lenses. Even still, a picture taken on a larger format film beats the results from these cameras any day.
Now that we are in the digital era, things are no different. If you want the best quality images, you need a camera with a large sensor. Digital single lens reflex cameras typically have a sensor which is between 40 and 100% the size of 35mm film. Compact cameras have sensors which are much smaller than this - down to 4mm x3mm.
At the same time that they are reducing size, manufactures are cramming more pixels onto the sensors to up the resolution. Three megapixels became 5 megapixels and so on. The reason being that you start to see the actual pixels when you print a 3mp picture larger than 10x15cms. By comparison, a 8mp picture can easily be enlarged to A4.
The more megapixels there are in a picture - that more memory it takes to store it. In order to fit these huge files onto reasonable size memory cards, the images are compressed. The result of this compression can be seen in large areas of one colour e.g. in skies. These are called JPG artefacts (the standard method of compression).
Also, more pixels on a small sensor means that the size of each pixels is getting smaller and smaller. The trade off for that is what is called termed digital noise* and reduced dynamic range.
If you want a compact size camera which produces detailed images these are the prices you have to pay.
My new toy, the ultra slim Panasonic Lumix DMC FX30, packs a 7.1million pixel sensor and a wide angle 3.5x zoom lens in a body which is about the size of a mobile phone. It will be great for carrying round but if I try to use it at above 200ASA (in dim light without flash) the results could be disappointing. Outdoors in the sunshine of Spain it should be perfect.
When I want to get serious though; I'll still be hawking my Canon DSLR around. That produces useable pictures even at 1600ASA (e.g. my pictures of Semana Santa).
* At best, digital noise looks like the grain pattern you got on pictures taken with fast films. At worst it obscures detail replacing it with a blurr of different colours.