Now you can store 2 pixels of image data in each byte of memory. You can see the file will be getting bigger. 8 bits per pixel. Here you are only able to store one pixel per byte of memory. And again you can choose to optimize your color palette.
Gray scale is good for black and white photo scanning.
Most animated internet images use 256 colors. This is for company logos and such. This setting produces a small image size and has relatively many colors to choose from. 16 bits per pixel. This will give you 65536 colors and I believe is sufficient for storing photographs.