Hap, extension tubes are basically hollow pieces of plastic that go between the lens and the camera body. They have the appropriate electrical connections so your AF and metering still work properly.
What they do: The farther the lens is from your sensor, the closer it can focus. So extension tubes basically allow you to focus closer without any loss of image quality.
Knowing life can't be THAT easy, and everything is a give and take, here's what you lose with extension tubes: Light. With all 3 Kenko tubes (which I recommend) stacked, I can get incredibly close but lose probably 1.5 stops of light. Meaning where my shutter speed would have been 1/60, it is now about 1/25.
The other thing you sacrifice with tubes: The ability to focus from a distance. With all 3 tubes stacked on my 100mm macro, I probably can't focus from more than a foot away from my subject.
The 500D is Canon's dual-element diopter, it has been excellent to use, especially in combination with the smallest extension tube, and I have seen no loss in image quality. With a diopter, you usually sacrifice image quality but you don't lose light.
For me, a combination of both is perfect. I usually use the 500D and the smallest extension tube. I lose maybe 1/2 stop of light, but can get extremely close and have the range to back up a bit if I need to.
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