RAW

Unlike JPEG and TIFF, RAW is not an abbreviation but literally means "raw" as in "unprocessed". A RAW file contains the original image information as it comes off the sensor before in-camera processing so you can do that processing afterwards on your PC with special software.

The RAW Storage and Information Advantages

Even though the TIFF file only retains 8 bits/channel of information, it will take up twice the storage space because it has three 8 bit color channels versus one 12 bit RAW channel. JPEG addresses this issue by compression, at the cost of image quality. So RAW offers the best of both worlds as it preserves the original color bit depth and image quality and saves storage space compared to TIFF. Some cameras offer nearly lossless compressed RAW.
 
The Flexibility of RAW 
In addition, many of the camera settings which were applied to the raw data can be undone when using the RAW processing software. For instance, sharpening, white balance, levels and color adjustments can be undone and recalculated based on the raw data. Also, because RAW has 12 bits of available data, you are able to extract shadow and highlight detail which would have been lost in the 8 bits/channel JPEG or TIFF format. 
 
Disadvantages of RAW 
The only drawback is that RAW formats differ between camera manufacturers, and even between cameras, so dedicated software provided by the manufacturer has to be used. Furthermore, opening and processing RAW files is much slower than JPEG or TIFF files. To address this issue, some cameras are offering the option to shoot in RAW and JPEG at the same time. As cameras become faster and memory cards cheaper, this option has no longer performance or storage issues. It allows you to organize and edit your images in a faster way with regular software using the JPEGs. But you retain the option to process in RAW those critical images or images with problems (e.g. white balance or lost shadow and highlight detail). Another trend is that third party image editing and viewing software packages are becoming RAW compatible with most popular camera brands and models. An example is Adobe Photoshop CS. However, as stated in my Photoshop CS review, the way Photoshop processes RAW files can be different from the way the camera manufacturer's software does it and not all settings may be recognized.

White Balance

Color Temperature

   Most light sources are not 100% pure white but have a certain "color temperature", expressed in Kelvin. For instance, the midday sunlight will be much closer to white than the more yellow early morning or late afternoon sunlight. This diagram gives rough averages of some typical light sources.

Resolution

Sensor Resolution

   The number of effective non-interpolated pixels on a sensor is discussed in the topic about pixels. 
 
Image Resolution

   The resolution of a digital image is defined as the number of pixels it contains. A 5 megapixel image is typically 2,560 pixels wide and 1,920 pixels high and has a resolution of 4,915,200 pixels, rounded off to 5 million pixels. It is recommended to shoot at a resolution which corresponds with the camera's effective pixel count. As explained in the pixels topic, shooting at higher (interpolated) resolutions (if available as an option) creates only marginal benefits but takes up more card space. Shooting at lower resolutions only makes sense if you are running out of card space and/or image quality is not important.

JPEG

   The most commonly used digital image format is JPEG (Joint Photographic Experts Group). Universally compatible with browsers, viewers, and image editing software, it allows photographic images to be compressed by a factor 10 to 20 compared to the uncompressed original with very little visible loss in image quality. 
 
The Theory in a Nutshell
   In a nutshell, JPEG rearranges the image information into color and detail information, compressing color more than detail because our eyes are more sensitive to detail than to color, making the compression less visible to the naked eye. Secondly, it sorts the detail information into fine and coarse detail and discards the fine detail first because our eyes are more sensitive to coarse detail than to fine detail. This is achieved by combining several mathematical and compression methods which are beyond the scope of this glossary but explained in detail in 123di. 
 
A Practical Example 

   JPEG allows you to make a trade-off between image file size and image quality. JPEG compression divides the image in squares of 8 x 8 pixels which are compressed independently. Initially these squares manifest themselves through "hair" artifacts around the edges. Then, as you increase the compression, the squares themselves will become visible, as shown in the examples below, which are magnified by a factor 2.

Noise

The standard deviation measured in a uniform area of an image (in the above examples measured in the red channel) is a good way to quantify image noise as it is an indication of how much the pixels in that area differ from the average pixel value in that area. The standard deviation in the noisy examples C and D is much larger than A, B, and E. Crop E shows that noise reduction can go a long way.

The Cause: Sensor Noise 

Each pixel in a camera sensor contains one or more light sensitive photodiodes which convert the incoming light (photons) into an electrical signal which is processed into the color value of the pixel in the final image. If the same pixel would be exposed several times by the same amount of light, the resulting color values would not be identical but have small statistical variations, called "noise". Even without incoming light, the electrical activity of the sensor itself will generate some signal, the equivalent of the background hiss of audio equipment which is switched on without playing any music. This additional signal is "noisy" because it varies per pixel (and over time) and increases with the temperature, and will add to the overall image noise. It is called the "noise floor". The output of a pixel has to be larger than the noise floor in order to be significant (i.e. to be distinguishable from noise). 
 
The Effect: Image Noise 

Noise in digital images is most visible in uniform surfaces (such as blue skies and shadows) as monochromatic grain, similar to film grain (luminance noise) and/or as colored waves (color noise). As mentioned earlier, noise increases with temperature. It also increases with sensitivity, especially the color noise in digital compact cameras (example D below). Noise also increases as pixel size decreases, which is why digital compact cameras generate much noisier images than digital SLRs. Professional grade cameras with higher quality components and more powerful processors that allow for more advanced noise removal algorithms display virtually no noise, especially at lower sensitivities. Noise is typically more visible in the red and blue channels than in the green channel. This is why the unmagnified red channel crops in the examples below are better at illustrating the differences in noise levels.

Sensitivity (ISO)

          ISO 100                               ISO 800

    Conventional film comes in different sensitivities (ASAs) for different

purposes.The lower the sensitivity, the finer the grain, but more light is

needed.This is excellent for outdoor photography, but for low-light conditions

or action photography (where fast shutterspeeds are needed), more sensitive

or "fast" film is used which is more "grainy". Likewise, digital cameras have an

ISO rating indicating their level of sensitivity to light. ISO 100 is the "normal"

setting for most cameras, although some go as low as ISO 50. The sensitivities

can be increased to 200, 400, 800, or even 3,200 on high-end digital SLRs.

When increasing the sensitivity, the output of the sensor is amplified, so less

light is needed. Unfortunately that also amplifies the undesired noise.

Incidentally, this creates more grainy pictures, just like in conventional

photography, but because of different reasons. It is similar to turning up the

volume of a radio with poor reception. Doing so will not only amplify the (desired)music but also the (undesired) hiss and crackle or "noise". Improvements in sensor technology are steadily reducing the noise levels at higher ISOs, especially on higher-end cameras. And unlike conventional film cameras which require a change of film roll or the use of multiple bodies, digital cameras allow you to instantly and conveniently change the sensitivity depending on the circumstances.