How does the motor efficiency reduce with its size?

Every motor type (synchronous, squirrel cage and wound rotor induction, direct current, permanent magnet, linear, switched reluctance, etc.) all have a "sweet spot" in terms of efficiency. Some are designed to work well at low- to moderate-power ratings and high speed; others are best suited for high-power and slow speeds.

Most low-power motors are designed to operate against fairly simple load torque profiles; this means they can be optimized quite readily because there isn't much in the way of "oversizing" required. Both motor performance and load are well understood and the abundance of alternative suppliers means designing for something that sets one manufacturer apart from the crowd - which could be efficiency, cost, delivery, reliability, or some other criteria.
Induction motor
As motors get to higher power and/or slower speeds (i.e. high torque), the applications become more customized, and the motor requires certain characteristics not found on the "bare bones" designs. Efficiency may not be the driving criteria for this type of equipment; it may be starting torque, or the ability to handle rapid reversals, or operation in a hazardous environment, etc.

All motors have an "efficiency vs speed" and / or "efficiency vs power" curve associated with them. Some curves are very flat - only a few tenths of a percentage point between full load and no load (with the highest efficiency point falling somewhere between 75 and 100 percent load). Others have a very dramatic change with speed and/or power (as much as 10-15 percent swing). When the dramatic swing happens, it is often due to the "constant" losses (such as core loss and windage / friction) being a large portion of the total, while "variable loss" (such as stator and rotor copper losses) are a much smaller value.

The reason the greatest efficiency typically falls between 75 and 100 percent of rated load is that motors are optimized for the specified full load point - including efficiency. If the best point appears lower on the curve, chances are good that somewhere between the end user and the designer, someone decided to "bump up" to the next rating, to be sure to have enough power / speed for later process changes.

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