On any piece of storage media, there is a certain ammount of space. However, because of the way machines work (or possibly simply to speed things up - choosing a cluster size of 1 bit would be painfully slow for almost anything, if even possible) they prefer to deal in chunks.
Think of an SMC a bit like a library filled with empty books numbered 1 to god knows how many. When you write something to your SMC, a mechanical arm is scribbling inside the books whatever it is you're putting on your SMC. Like in life, some stories/files span several books - war and peace in 1 volume isn't entirely sensible, let alone the average encyclopaedia. However, again, just as in real life, you can't have lots of books in the same volume - there's only room for one name on the cover (except in the case of compilations, but lets not go there). So if there's empty space at the end of a book, it just gets wasted.
Not a problem if you're only dealing with very large files, but if you're dealing with smaller ones or space *really* matters, then the cumulative loss is fairly big - there's only so much paper in the hypothetical library.
The response to this could be "let's make the books shorter" - what I was going on about earlier. This means, of course, that there's less chance of white space at the end of a file, and even if there is some, it'll probably be less. However, the mechanical arm has to do more moving, and if you've ever worked wth mechanical arms, you know how slow they are, although seeing as there's less weight in the book (this arm, I'd like you to imagine, is very sensitive to things like that) due to less paper, it might make its movements faster.
The other is to leave books the same size they were and not even go near the read/write speed loss. There are advantages to both, but generally, the smaller cluster size is more useful. SOME programs can have trouble with it though, if you're unlucky.
Hope that cleared up clusters - if anyone has any corrections to make, please do so - its too late for me to be writing this anyway, so there's a good chance the analogy isn't watertight.