NOTE: Not to scale, but closely illustrates the relative differences between the sensors.

DSLRs and compact Point & Shoot digital cameras

This illustrates the comparative image size as the different digital camera sensors see it, based on their relative size. It does not take much imagination to understand how important these differences are. Simply put, the smaller the sensor, the smaller the area across which the image is spread. The benefits of a larger image size should be intuitively clear. To get an enlargement, you would have to increase the smaller image much more than the largest one, and that translates into a loss of some fine detail.