In short, it is the average space between the processor’s logic gates (transistors).
It makes all the difference in speed, and a considerable difference in power consumption.
For example, i ran a certain task on both of the following processors
E3300 which is a low cost celeron processor with a lithography of 45nm and (1M Cache, 2.50 GHz, 800 MHz FSB)
Q6600 Which is a much more expensive (at the time when both were purchased) with a lithography of 65nm and (8M Cache, 2.40 GHz, 1066 MHz FSB)
When comparing a single core’s throughput, the cheap celeron processor beat the quad core by a very considerable number, much higher than the difference in clock speed, The actual numbers would need me to explain many factors such as the nature of the millions of records that needed processing, how they were processed, how jobs were distributed between computers, how the random sample is guaranteed to be random and so on, and i don’t think this is very relevant to you.
So, lithography is something you should really consider when buying a processor, the lower the better, my laptop’s I7 is built with a lithography of 22nm, this is the best number as of 2013.