650 is for people of shorter height. Sometimes marketed as a women's bike with a small frame. A friend of mine bought one for his 9 year old son and it looked a little too big for him. He only needs it for the 4 mile bike portion of ironkid triathlons so perfect fit was less important than going faster than the other kids on 24" mountain bikes.
Optimal bike fit is what is important.
I don't think the tire size is an issue between 700 and 650. I use 650 on my Bacchetta Corsa and they are also popular on many Tri-athlon bikes. I think they are as "fast" as a 700c and may weigh a little less, but not significantly less.
650C wheels are harder to find compared to 700C and there are many more types of 700C tires available compared to the 650. This being said, I am really happy about the Continental GP/Gator that is available in 650C as well as 700.
Here is an interesting link about tire (tyre) sizes from cycling guru Sheldon Brown (RIP).
http://www.sheldonbrown.com/tire-sizing.html
From what I have read the 650 tire was initially used on TT bikes to create a smaller front for the rider, thus creating less drag and improving speed. If you watch old races riders used a 650 in the front and a 700 on the back. However, a 700 is faster in general as you travel further each time the wheel goes around. New aero technology makes the improved aero properties of a 650 front wheel, not to mention rules that now prohibit non-matching sized wheels, not as valuable as the speed of a 700.
It's the same reason the 26" mountain bike wheel has basically disappeared at the pro level in favor of the 29" wheel, it's faster.
Personally, I feel that there is a lot of misunderstanding regarding 650c wheels. If you use equivalent gearing, they can be ever bit as fast as 700c wheels. I have won multiple State medals (lots of them gold).
I'm just shy of 5'10" so ride 650c by choice, not because I have to. More important than lower frontal-area, they have a much lower moment-of-initeria, so they accelerate like crazy. Also, a nearly 200-pound rider like me can get away with much lower spoke count as the smaller wheels are much stronger than their 700c equivalents.
However, most manufacturers don't equip their 650c wheel bikes with equivalent gearing, so they often seem slower as the rider has lower gears. Whereas "standard" gearing for 700c has been 53/39 in front, a 650c bike needs a 55 or 56-tooth outer ring to gain parity with a 700c bike. A correspondingly up-sized inner ring is required as well; I ride a 44-tooth.
I do feel that 650c wheels are important for shorter riders though, as they allow the front-center of the bike to be shorter without problems created by excessive toe-overlap.
True, wheel and tire choices are limited, but there are still lots of excellent options available.
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