You need to create a partition (or partitions) on the drive.
What you have selected is the physical hard drive itself, which can be split into virtual hard drives as far as the operating system is concerned.
So you could split a 750GB drive into a 250GB System partition for OS X and your apps, and a 500GB Media partition for all your photographs, videos etc.
They would still be on the same disk, but you would be able to format the System partition independently of your Media partition, rather than erasing the whole disk, for example.
In the image you have posted, there are three drives, and two partitions.
The first drive (selected) doesnt have any partitions.
The second drive is 500GB in size and has a single partition named OS X (presumably also 500GB in size)
The third drive is 320GB in size and has a single partition named Media Drive