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There are many Go proverbs related to the size of the extension. The first of them is "Play away from strength". Now - what does it mean? Well - it means exactly what it says, hehe... If the enemy is strong in some area, do not extend too close in that direction - stay away from strength!! If you have a strong group somewhere, you may extend further away from it - stay away from strength!! As you see - "strength" means here both your strength and that of your enemy - and both of them you treat the same way - you stay away from them!
Lets look at an example to illustrate this proverb. Look at Fig 1-1. In Position 1 black extends with a 2-space extension towards a single white stone! This white stone is weak - so black is justified in extending that close. Black's single stone (from which he extends) is weak too, but a two-space extension is not too far. So - things are ok! Now - look at what happens if we change the position a little and give white some more strength in the area - as in Position 2. Now white does not have a solitary stone in lower left corner anymore - now he has a strong wall! And so black cannot extend that far anymore - he has to be more careful, he has to "play away from strength"! A 1-point extension as in Position 2 is ok in this case. What happens if black neglects to follow the proverb? Well - one of the possibilities is shown in Position 3 - as you see, black gets into trouble!
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From the above example, you can see that the spirit of the proverb "Play away from strength" is the balance between efficiency in controlling areas on one hand and safety of your stones on the other - some of which was already mentioned here. The ideal for controlling territory is to extend as far as possible, while the ideal for safety is to play tight and close! This proverb helps you find a compromise between these two ideals - and helps you decide what is more important in a given situation - control or safety.
First, let us look at the extensions away from friendly stones! If you extend too close to your own strong position, your move is inefficient - you could have extended further and taken control of more territory! Since you have a strong group in the immediate area, the enemy is not likely to start any fights with you there - and if he does, you just welcome the opportunity to use your strength to crush him! So, if you have a strong group - it is ok to "err on the side of control" and extend further than you would do without strong support!
Now - what about opponent's strength? Well - you still would like to extend as far as possible, but with a strong enemy group in the vicinity, he will be just too eager to start fights, even in places in which he would normally be cautious. And he will likely have the upper hand in such fights - remember, it is him who has a strong support in the area, not you! In such situation, it is better to "err on the side of safety" and extend not as far as you would like to do without the enemy strength!
So - you see that in deciding how far to extend, you have to take into account not only where you are, but also where the enemy is, and what are the relative strengths and weaknesses of both your camps!
This is another proverb which helps you decide how far to extend. It gives you a hint about the ideal extension from your wall (not taking into account the respective strengths and weaknesses of surrounding stones). It means that if you have a wall of the height 1 (which is just a single stone, as in Position 1 of Fig 2-1) - a perfect extension is a 2-points extension because 2 is one more than the height of your wall - which is 1, hehe.... Now - if you had a wall of height 2, as in Position 2, the perfect extension would be a 3-space extension. It is left up to you to figure out what is the ideal extension from a wall of height 3.
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Just remember - this proverb is just a "rule of thumb", it gives you an indication what is the ideal extension on an empty board or with no other stones close by! Any stones in immediate vicinity of the extension may influence it and force you to make a less-than-ideal extension (or maybe allow you a better-than-perfect one, hehe) - some of the reasons for this are covered in #1.