CSMA/CDM
The limitations on packet size are imposed on Ethernet because of physical considerations of the hardware. Ethernet is a shared medium (the multiple access in CSMA/CD), which is to say many machines are (at least conceptually) connected by a single piece of wire that they all use. If there is a signal on the wire, very soon it occupies all the wire: it's just way the electricity works. This single shared medium is called an Ethernet collision domain.
If host A in Figure below wishes to send a frame to host B, but C is already sending to D, then A must wait, since the shared cable is already occupied. Thus A listens on the wire (carrier sense) until C has finished and then attempts to send. However, B, say, might also be waiting to send to D, say. So A and B will start sending at the same time, both continuing to monitor the wire as they do so. Both A and B hear the frames clash (collision detection) and both stop transmitting immediately. They each wait for a small random time (they back off) and then start listening again. As the delay is random, one of the two will start before the other, thus resolving the clash.
This is why a packet has a minimum size: the speed of light in the wire. A packet has to be sufficiently large that all hosts on the network can see it before they decide to transmit. If very small packets are allowed, hosts can transmit a whole packet and not spot a collision further down the wire. See Figure below.
CSMA/CD is very good for low usage of the shared medium, but performs poorly for high usage due to many collisions: more time is spent backing off from collisions than sending packets. If a host has to back off more than 16 times, the packet is simply dropped. The network is so heavily loaded that there is no point in trying anymore. Again, a higher layer will have to take remedial action as necessary. If collisions hit less than 5% of packets, the Ethernet is considered to be working normally. If more than 50%, though, you should consider breaking the network up into smaller pieces.
