What condition is characterized by a significantly smaller head and impaired brain development?

The condition characterized by a significantly smaller head and impaired brain development is microcephalus. Microcephalus, or microcephaly, is a neurological condition in which a person has a smaller than normal head size due to abnormal brain development. This can occur due to various factors, including genetic abnormalities, infections during pregnancy, or exposure to toxic substances.

In contrast, macrocephalus refers to an abnormally large head size and is usually associated with various conditions that lead to increased brain or cerebrospinal fluid volume. Hydrocephalus entails the accumulation of cerebrospinal fluid within the brain's ventricles, leading to increased pressure and potentially an enlarged head, which is the opposite of microcephalus. Encephalopathy is a general term for brain disease or damage, but it does not specifically describe the condition of having a smaller head size or impaired brain development. Thus, microcephalus is the correct answer as it directly addresses the characteristics outlined in the question.