As explained previously (see section 2.4.1 `/etc/hosts'), `/etc/hosts' contains a table telling which hostname to map to which IP-number.
If you plan to use DNS, you will nevertheless have at least entries for localhost (127.0.0.1), your hostname (with it's own IP-number) and maybe the defaultrouter in `/etc/hosts'.
For example, here's a minimal `/etc/hosts' for DUSK:
# /etc/hosts 127.0.0.1 localhost 126.96.36.199 dusk
Besides these two entries, it's convenient to put any hosts into it which your system relies on, e.g. NFS-servers. This way, you can reach those hosts even during boot-time or if DNS is down.
But, if you're just running your private network at home, it's sufficient to put all your hostnames in `/etc/hosts', there's no need to set up DNS at home!