Cameras use maximum resolution and then downsize if you choose a smaller output pixel dimensions than maximum. Whether downsizing in camera produces a better quality file with less noise than what you can do yourself in an editing program is really what the issue is.

Quote:
say you have a 10mp camera, sensor size 2" x 2" (just for demonstration purposes)
when you shoot at max resolution, theoreticaly all 10mp are used , plus or minus a few
whn you reduce the resolution in camera does a smaller size of the sensor get used , say 1" x 1" , or does the camera still use all 10mp and then interpolate or something?
the reason why i am asking is that if you are not shooting for anything bigger than 8X10 would it help on noise reduction to reduce shooting resolution ?

With the lower settings, you are actually telling the camera to discard information that it would ordinarily record at the higher settings. This applies to people who shoot JPEGs as opposed to RAW photographs.

I have seen many people use lower resolution settings [e.g. JPEG Basic] to save space on their memory cards thus enabling more shots to a card. The problem is that this information is lost forever. Granted, most shots will likely be discarded. What about the shots you wish to keep? What if it is a shot that cannot be retaken? You will be lucky to get a good looking 3x5 out of it due to artifacts. When you tell the camera to discard information in favor of space, it approximates some of the pixels it tosses which you can easily see when you blow it up and it looks very bad. I recommend shooting at the highest JPEG value [JPEG Fine or whatever setting the camera manufacturer uses for the highest setting]. Why buy a 10 megapixel camera if you plan to tell it to use only 2 megapixels of space per inch?