http://knowledgebase.macrium.com/display/KNOW/Macrium+Reflect+v6+User+Guide
With the free version, you can make Full disk images and Differential images.
A
Full is obviously that. An image of the whole drive.
Differential - "A differential image stores the changes that have been made to the imaged file system since the last full image. Subsequent differentials can be taken, but only one differential and the full are required in order to fully restore the system.
This is quicker than creating a full image, however the longer the time between the full and the differential, the larger the differential image file is and the longer it takes to create"
So, you create a full, and then a series of Differentials.
If I want to go back to how the system was on Tuesday, I use the Full from the Sunday before, and the Differential from Tuesday.
(or whatever schedule you choose)
No, you don't make backups of the whole drive to DVD. I guess you could, but that would be a REAL pain.
Yes, both the drive you are backing up, and the drive you are backing up to, need to be on and available. It can be an external if you choose.