Here's a photo that should make things a bit more clear :
There are several ways to create depth in a picture. The obvious ones are using perspective and parallax scrolling (if we have a panning shot). There is also atmospheric perspective for things that are really far away (there are more ways to create depth but these 3 will do).
Notice in the foreground how highly contrasted and well defined the shapes are. The lightest and darkest values appear here next to each other, sharp edged.
The further away we go, the lesser this contrast gets. We don't have deep blacks and bright whites the further we go off in the distance. It all becomes middle tones. There's no sharp focus anymore because of the light being scattered more. This is not the same as using a simple blur. Notice how the line of the mountains in the distance is not a blurry line. It's a well defined line but all the colors have gone greyish (blueish, actually).
The scattering of light is quite technical (search for "Rayleigh Scattering" on wikipedia if you want to know all about it). In general, colors get duller and somewhat blueish towards the horizon but the important part is that the contrast gets lowered. If you would have a black and white chess board the size of a desert then the squares would be sharply defined black and whites near where you are standing but they would get duller the further away you look and in the distance you don't see the squares at all anymore, just a grey. The color might actually get lighter the further away you look. Just think of morning mist. Near you, things will look still pretty clear but the further away, the less you see of the environment and the more mist you see until it gets an opaque grey or white. If you really want high realism then you need to know about how the atmospheric conditions influence colors in the distance (a summer day or a winter day will look different in the way colors get influenced in the distance).
But the gist is :
Stuff that is close by will have high tonal contrast (showing everything between the darkest and lightest tones) and will have the strongest colors.
Stuff that is far away will have low contrast (a bunch of middle tones) and will have duller colors which will tend towards blue (colors get cooler).
Edit : looking at the Rayleigh Scattering page on wikipedia, I've found this one
http://en.wikipedia.org/wiki/Aerial_perspective. It's called aerial perspective here and describes everything I've written before. Looks like I read this page before posting this but I didn't learn it from wikipedia but from a book
