Tutorial

http://www.smashingmagazine.com/2009/03/04/50-stunning-photoshop-text-effect-tutorials/

JPG - Joint Photographic Experts Group

• The JPG file is "perfectly small".
• It can be compressed to as small as 1/10 of the size of the original data.
• The aim of Jpeg compression is to take full-color (and gray-scale) "real-world" scenes and reduce the file size of images for storage and transmission.
• This format is used for images that must be small files
• websites
• emails 
• JPG uses lossy compression.
•  meaning, some image quality is lost when the JPG data is compressed and saved, in which the original quality can never be recovered.
• JPG modifies the image pixel data (color values) to be more convenient for its compression method.

     
The picture on the left, various grey-scales A to E, represent gradual changes in brightness and is in GIF format, as you can see the color changes are smooth. After several Jpeg compressions are applied, the image loses its smoothness and quality as seen in the right hand image.

SOURCES:

http://photo.net/learn/jpeg/ - "Visual Perception" and "History of Jpeg"