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Raster images (also called Bitmaps) The most common formats for raster image files are:
JPG, JPEG, TIFF, GIF, PCX, BMP, PSD

These are composed of pixels (dots) and have a fixed resolution. Raster images can be created by digital imaging devices such as scanners or digital cameras. They can also be created in paint packages like Adobe Photoshop and other programs. 

If both the resolution and the number of colors is high, raster images can be an excellent artwork source, showing a huge amount of detail. However there are limitations to their effectiveness. As you zoom into a raster image, you start to see the dots spread and become quite blocky, perhaps even distorted. Also, a detailed bitmap image can be quite a large file. The larger the bitmap, the slower it is to pan, zoom and process it.

A vector file is a drawing stored as a collection of geometric objects, such as lines and curves, which are drawn between specific coordinates. A closer vector document magnification reveals details more accurately and the line edges stay smooth. Vector drawings are used in applications where accuracy is important. Most common formats for vector image files are: EPS, AI, CDR, PDF, DXF, WMF

The advantages of Vector drawings are they can be scaled up or down to any size without loss of detail or jagged edges, they can be printed at any resolution, many times they will require less storage and can be processed faster, they are easier to edit the individual elements of a design, and they are the only format that can be used for a plotter.