Whatever make or model of digital camera you have, it will almost certainly have an option in the menu that allows you to select image quality. What this option is doing is setting the level of file compression. Fortunately even at the lowest quality setting, most modern digital cameras don't use particularly fierce compression. The following examples were shot on a fairly typical 12-megapixel pocket compact, a Pentax Optio S12, at the one, two and three-star quality settings. As you can see, the difference in quality is not immediately obvious. The file sizes for the full images were 1.4MB, 2.0MB and 3.0MB respectively.
It is possible to set even higher levels of compression using an image editing program. By saving the highest quality image at the strongest JPEG compression setting in Photoshop, the file size is reduced to just 350KB, but look what happens to the image quality.
Those odd marks are compression artefacts, caused by the same process of discarding information. Unfortunately some cameras don't handle compression as well as others. Here's an example from a budget 6MP compact from one of the lesser-known brands. It was taken in 2006.
If you look at the blue door in at full magnification, you'll see traces of those same compression artefacts.
Fortunately, the price of high-capacity memory cards is now so cheap that there's really no reason to use anything other than maximum quality all the time, apart from maybe a slight increase in performance for some cameras. In fact some very recent cameras have done away with the image quality setting altogether, a trend which is likely to continue. As long as the default setting is for the lowest possible compression and the highest possible quality, this can only be a good thing.