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Blurring occurs because of the inherent way Bitmap (or Raster) images are constructed. Essentially, these are nothing more than a collection of colored dots. The dots are referred to as PixEls. (a contraction of Picture Elements)
If you shrink a bitmapped image, the computer has to recalculate what colors the dots are, because essentially some are being removed. The result of this is that the clarity begins to suffer.
As for why the text in captions doesn't get scaled down, there are options that you can set to tell Captivate to leave those elements alone when resizing. Odds are, this option told Captivate to leave the Captions as is.