Lossless compression reduces file size without losing any data, allowing the original file to be perfectly reconstructed. This method is ideal for text documents and certain image formats like PNG, where maintaining quality is crucial. Examples of lossless compression algorithms include ZIP and FLAC. In contrast, lossy compression reduces file size by permanently removing some data, which can affect quality. This technique is commonly used for audio and video files, such as MP3 and JPEG formats, where a slight loss in quality is often acceptable for significant space savings.