There is a great deal written (some accurate, some not) about the dynamic range of digital cameras and how this range differs from that of film cameras. I find it interesting and informative to read the varying (sometimes wildly varying) opinions about it, but I usually end up more confused by the end of an hour of reading than I was at the start--largely because the experts tend to disagree pretty emphatically (and if you read some of the online bulletin board exchanges, pretty rudely, too) about just how digital cameras stack up against film cameras in dynamic range.
No one argues about how the dynamic range is actually defined: in very simple terms it's the range between the darkest shadows and the brightest highlights in which the camera can record detail. And it's pretty much accepted that a digital camera's contrast range is narrower than film's (particularly color-negative film); in other words, most experts agree that a good quality color negative film, properly exposed, can record a wider range of tones than a digital camera (also, only when properly exposed). The actual dynamic range of a particular digital camera depends on a lot of factors, including the size and design of your camera's digital sensor. Your camera manual will provide some insight into those particulars. Generally, the larger the sensor your camera has, the wider its dynamic range; which is why a full-frame digital camera--one that has a sensor that's the same size as a frame of 35mm film--usually has a broader dynamic range than a camera with a smaller sensor. (In fact, overall, all aspects of image quality get better with a larger sensor.)
The important thing to remember is that your camera does indeed have a limit to its ability to record contrast and if you try to exceed that range, something is going to give. Not maybe, definitely--either the highlights or the shadows (or both) are going to get lost. How your camera reacts to a very contrasty scene (and which end of the scale it dumps) depends almost entirely on how you expose things. If a scene has very bright highlights and very dark shadows, you can usually (not always) expose to capture one end of the range knowing that you are willingly sacrificing the other. In other words, if you really want to record detail in bright highlights (and normally you should--there are exceptions), then you will have to cut the exposure to bring highlight detail into range. Doing this, however, will cause the shadows to lose all detail. On the other hand, if you set exposure for the shadows, you will gain detail there, but lose most highlight detail. The contrast range never changes for a particular scene at a particular moment, but by altering the exposure, you shift which part of that range you're going to record with detail.
There are times, of course, when the scene will wildly exceed your camera's contrast range and even your ability to only record a portion of that range. In the scene here (shot in the Chincoteague National Wildlife Refuge in Virginia), for example, the presence of specular highlights made it impossible for me to hold the very bright highlights on the water. If I had exposed for them (and theoretically that might be possible), the rest of the scene simply would have gone black or near black. Blehh! Instead, I simply chose to expose the best I could for the grasses and the silhouette of the goose in the foreground and let those super-bright highlights just blow out. Yes, I could have shifted the exposure down a bit, perhaps underexposing by two or more stops from what I shot it at, but then the light airy feeling of the brilliant morning sun would be lost. Detail or not, I liked the way the highlights turned to a wash of specular highlights. Also, since I shot this in RAW format, I could easily have corrected the exposure to a fair degree in editing but chose not to do that.
Two things to keep in mind about dynamic range: One is that camera makers are improving it and stretching it all the time--in a few years, the range is probably going to be extraordinary. Two, in many situations you can use a technique called high-dynamic-range imaging to vastly extend the dynamic range of digital images. I'll talk about the latter technique in a future tip. In the meantime, if you want to read more about it, Ferrell McCollough has written a great book on the topic called Complete Guide to High Dynamic Range Digital Photography (A Lark Photography Book).