Create a new network vs. extending a network?

I bought an Airport Extreme to provide better WiFi coverage in my house.

The Wifi was already established by a TimeCapsule and so I thought I should "extend a wireless network". I therefore chose that option and gave the APXtreme the same name and password for the network as on my Time Capsule.

It seemed to go fine and the Airport utility showed them both connected and everything green.

However, after a while the internet connection began to drop and show orange status in the utility.

Internet would be off for a few minutes at a time, but would always come back.

While trying to resolve the problem I reset the APX to standard settings from the Airport utility menu.

When it came back up it asked to extend an existing network, which I allowed.

After it finished setting up (I expected to have to give it WiFi name and password, but it figured that out by itself) the airport utility showed everything green and the internet is now stable.

What I find strange is that the APX setting for wireless is set to "Establish a new network", NOT "extend a wireless network" and everything seems stable, with no drop-outs for internet.

Both my TC and APX have the same WiFi name and password and moving around the house my iPad and iPhone always connect without question.

So, what is the "extend a wireless network" for if it creates conflicts?