What Does 'Diffraction-Limited' Mean?

I've seen a lot of people list "diffraction-limited" as a concern about the 24MP Sony NEX-7, so I thought it would be good to post an example to clarify this issue.

Diffraction is a physical property of the lens. When a lens is set to a high f-stop (small aperture), light waves passing through spread out and interfere with one another in a way that limits the amount of detail in the image projected upon a sensor. A particular camera lens may, for example, project a very sharp image on the sensor at f/5.6, a less detailed image on the camera at f/11, and a less detailed image still at f/22. This is purely a function of the lens aperture and has nothing to do with the sensor resolution (megapixel count).

Say that lens were mounted on a typical 16MP APS-C camera. That camera will have enough sensor resolution to show the differences in the images it is receiving at those three different f-stop values. The amount of detail in the final image produced by the camera-lens system will be limited by lens diffraction (f/5.6 print will show more detail than f/22 print).

Now imagine that the camera has a 1-pixel (not one megapixel) sensor. With a single pixel, the sensor obviously cannot record any spatial information. The sensor is blind to the fact that the lens is delivering a less detailed image at f/22 than it is delivers at f/5.6. The resulting print will look the same in either case; ie, the final image in this case is not diffraction limited because it is limited by sensor resolution.

Below is a series of simulated crops from equal-sized prints made by three different cameras: a 16MP camera, a 4MP camera, and a 1MP camera. For each camera, crops are shown with the lens set to f/5.6, f/11, and f/22.

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Some observations:

• The 16MP sensor capture enough detail to clearly record the differences in detail which the lens delivers at each of the lens apertures. Thus, there is an easily observable drop in final image detail between f/5.6 and f/11 and another drop between f/11 and f/22.
• The lower resolution 4MP sensor doesn't have enough sensor resolution to show a big difference between the f/5.6 and f/11 images but can capture enough detail to discern a significant drop in detail between f/11 and f/22.
• The 1MP sensor doesn't have enough sensor resolution to show a big difference between even the f/5.6 abd f/22 images.
• As the f-number goes up and the effects of lens diffraction increase, less detail is delivered to the sensors, and therefore the differences in final output becomes less. For example, there is big difference between the 16MP and 4MP when the lens is delivering a very detailed image at f/5.6. The difference between final output between these cameras is noticeably less at f/11 and negligible at f/22. A high resolution sensor cannot capture detail which the lens doesn't deliver.

Conclusions:

• The observation that a given camera system becomes "diffraction-limited" at a certain f-stop is another way of saying that the camera system is "not sensor limited" for that f-stop. It's a good thing for a camera to be diffraction limited at a low f-number.
• Diffraction is a property of the lens and not a disadvantage of having smaller pixels (higher pixel density).