When I have it set to the highest JPG quality, my 8GB card can hold about 1000 images. If I switch to RAW format, it drops the capacity to about 200 images.
So why do images captured as RAW take up 5 times the space of images captured as JPEGs? Is the picture quality that different?
Raw files are an intermediate format. It's essentially the unmodified sensor data (often in Bayer pattern), packaged with a bunch of metadata about the shot as well as a JPEG preview (for quick viewing). The data is both losslessly compressed and of a higher bit depth than that of JPEG.
You only need to shoot raw if you wish to develop the photos into JPEGs, or other destination formats such as TIFF or PNG, yourself by using a software suite. This has many benefits to photographers wanting to take their photos beyond the camera, as well as provides the ability to extract information that might otherwise be lost. For example, bringing out detail in shadows, bringing back detail lost in highlights.
A raw file is analogous to a film negative in the fact that you can keep producing different versions of a photograph by manipulating settings such as contrast, saturation, white balance, black and white etc.
The main thing to note is that raw files are nothing more than the base data for creating a JPEG representation. They're not some better format of photo, because they're not the format used to print or to upload to the internet. They're the egg and you are the frying pan. Shooting JPEG means the camera fries the egg for you, in a way you may or may not like. I personally don't take the chance.
RAW files contain the raw data right form the chip (often uncompressed, or otherwise compressed losslessly). They also contains more bits per pixel (usually 12 or more, per color channel) compared to JPEG, which only stores 8bits per pixel & color. These extra bits give you a much wider range of light/dark values, and more granularity within the range of available values, for all three color channels. This is also known a Dynamic Range.
In other words, JPEGs "save" space by login two pieces of information: (a) dropping dynamic range down to 8bit and (b) lossy-ly compressing the resulting data.
Is the picture quality that different?
Yes, and no.
The RAW file does contain that much more information, but it's more information than is possible to make visible in an image, so you can't see all the difference.
The extra information in the RAW image is useful if you need to process the image afterwards. If the image is underexposed or overexposed, or if you need to change the contrast, the extra information in the RAW image will keep it from degrading as quickly.
If you process a JPEG image too much, you will see the lack of information as banding or compression artifacts. The JPEG image contains just enough information to make it look like it does, all extra information is removed in the conversion to the 24-bit color depth and the image compression.
JPG files use lossy compression, which means that as well as throwing away some information, they take up less space. RAW is effectively a direct sensor dump - nothing is thrown away or compressed (though some cameras offer a compressed RAW option).
