Nodsu is right, it is the codec that matters. The most popular codecs out there that give a nice combination of good picture quality and size are the DivX and Xvid codecs. The best quality however would be given by an H.264 codec like x264. However this would create very large files.
go to www.videohelp.com and read for about a year and then post and take the insults. Generally AVI is just a container for different codecs. Mpg is the final product on your dvd but it's generally not good for editing.