When does it help to restore an iDevice using iTunes, as opposed to "erase all content and settings"?
Erase all content and settings does exactly that, it erases user data and restores default settings - but leaves the current version of iOS intact.

Performing a full restore through iTunes is the only way to completely erase the device and perform a fresh installation of iOS.

If you've any doubts then the iTunes restore is probably your best option as it will update your version of iOS, with the option of backing up and subsequently restoring your apps, music and other settings with the minimum of effort.