When a continuous time signal is digitized, because there isn't an infinite number of discrete digital levels, the difference between the actual analog value and the digital representation of that value is defined as the quantization error.
With a 3 bit ADC this gives 23 = 8 levels.
With a 5 bit ADC this gives 25 = 32 levels. With 32 quantization levels the analogue input is more closely followed by the digital output.
For a real signal digitising this with a 3 bit ADC gives a very poor representation of the signal.
Increase the ADC to 5 bit and the digital representation is much closer to the original signal.
See also: Analogue to Digital converter.