Welcome to SL, Veruca!
1. Shapes, are these made from prims? Or are people just playing around with the charector appearence generator to get it? In general, most avatars that look largely Human are made using just the appearance sliders and textures. Those who do not look entirely Human, such as Furries (I'm normally an anthropomorphic red fox vixen, myself), tiny avatars (almost anything less than 4 feet tall), cyborgs, etc, usually involve prim parts and possibly animation overrides, as well.
2. Skins and makeup, are these generated in photoshop using the templates then imported and just worn as tattoos?With very few exceptions, yes. Avatars that use prim parts, as noted above, may or may not have a fair amount of original skin showing. In this case textures also have to match between the skin and the prims texturing. A basic Human skin has three tattoo layers applied to it, for head, torso and lower body. The good human skins are semi-transparent in these layers, so appearance sliders can add things like blush in the cheeks or slight changes in skin tone overall. Makeup variations are usually a different complete skin with the head tattoo changed. Nail polish for hands and toenalis is possible to do directly on a skin, but it works better to do that as gloves and socks, with everything transparent but the nail enamel. (SS Labs sells wonderful nail polish gloves and socks for Humans) Obviously if the entire body is hidden by prims, there is no skin coloring needed. (Such as for a robot, or an armored knight with a full visor...).
Incidentally, there is a request in to Linden Labs for mulitple tattoo layers, so a skin tattoo and the makeup applied over that skin on the face could be two differnet layers, or so a skin could have one additional body art tattoos layered onto it without having to merge the art tattoo with the skin layer tattoo.
3. If I wanted to create a totally new avatar for myself, what are the steps involved. I'm basically looking for general steps, like the avatar needs to be made from a prim, skin and makeup in photoshop, poses are scripts. Stuff like that.For a Human, a lot can be done just with appearance sliders. I would start with that first, as the final shape of the avatar will distort skin textures differently. For example, an avatar that is muscular versus one who is pregnant. Furries and other avatars that require add-on prim parts require building those parts up out of prims, linking them tohether, and positioning the prims on the avatar. Use of a posing stand helps a lot there, as it holds the body in a static pose, oriented squarely on the NSEW axis lines. Then add skin and prim textures as needed. Scripts can be used to hide/show prim parts, for changing facial expression of a prim head, or doing other things. Tiny avatars use a special script to scrunch up the body, and may use 'invisiprims', which are prims that mask the presence of other nearby prims. Furries that have digitigrade legs often, but not always, use prims and invisiprims to get a decidedly more animal-like leg structure.
Poses and animation overrides for a sexy walk or similar stuff are usually an add-on attachment, worn as a small hidden or invisible object, or as an HUD control. Some times, as mentioned with tinys, some pose scripting is built in to the avatar.
4. And last but not least, eyes and hair. Are each of these made from prims as well?For eyes, it depends on the avatar. For most Humans, eyes are a texture applied in the Appearance controls. You can apply an eye texture there and save an appearance file, which will give you an object in your inventory that can be dragged to an avatar to change just the eyes. My "Feral Eyes" products, which give a human avatar eyes with cat-line vertical slit pupils, work like that. Avatars with prim heads usually use animated textures on prim surfaces to have eyes that can blink. My current favorite furry avatar has three parts to the eyes - a top layer that is the eye expression and blink animation, and two lower layers that allow the two eyes fo be colored seperately, by showing through a transparent part in the upper layer. Scripts allow the eye expression to change with facial expression. On the other hand (or paw, as it were

), some furry avatars use only a partial head mask of prims, and still use the Human eyes. Most of the avatars from Jakkal's Werehouse are like that.
For hair, the more complex styles are usually at least partly made of prims. Most prim hair will include a 'bald wig' that is an avatar hair setting for no visible hair, so the other hair doesn't show through. But I have a couple of lovely ponytail styles that use custom-textured avatar hair (non-prim) for on the head, and prim hair for the pony tail.
If you are interested in developing non-Human avatars, the best starting point is to obtain several free or inexpensive avatars similar to what you want to do, that are sold with modification rights, and take them apart to see how they were built. For no-mod avatars, you can usually still highlight the prim parts in edit mode to get a rough idea of what prims were used to make the shapes.
Of course, directly copying another person's work is not a good thing. But learning from the work of othrs and making something new on your own is welcome.
You may also want to contact other avatar makers directly, if there is some feature that they have accomplished that you would like to learn how to do. While some may want to protect their specific textures or scripts that make their work special, many avatar makers are willing to help new content creators to get started.