Photoshop is raster-based, as opposed to vector-based (Illustrator). This means it uses pixels, which have colors associated with each one.
Part of Photoshop CS5
Part Type Entity
Screenshot Vector vs raster.png

Vector vs. Raster

To understand when it's best to use Illustrator, you need to get a handle on vector and raster images. A rasterized image is made up of pixels and does not scale up without decreasing quality, while a vector image contains is merely point information connected by specific curve angles and can be scaled up without any loss of quality.

In the image above: ' Vector: Left, Raster: Right