In terms of backing up your computer system, a system image is a complete image (copy) of a hard drive, which may or may not be partitioned, and allows your computer to be restored from the same system image.
A file back up backs up a set of files or partitions that you choose.
System restore is used to restore your computer to a point where you know it was working properly.
In my case I have a C drive, which contains the operating system and my applications. This partition is backed up on a regular basis using Windows 7's system image backup and can be restored quickly and easily should the operating system become corrupted.
I then have three other partitions: data, images and music, which are then backed up separately on a regular basis using Windows 7's backup software.
You can, if you wish, use third-party sofware such as Macrium & Acronis True Image etc., etc..