How small can a game get before it breaks down - and, just for reference, how large?
Well a lot of that varies. For instance, Horizon created a GREAT campaign I believe was called Distant Sun that deals with a number of battles involving less than 5 ships on a VERY small table. I even played a few and thought it worked well. On the flip side, I run BFG games at my local gaming group, so I need to plan scenarios with forces for 10+ people on an 8ftx5ft table. For instance, I ran a game just a few weeks ago that was essentially 3,000 points a piece, and it worked out great!
Really, it depends on how you structure your scenarios. The most basic game I think everyone plays is a 1500 points a piece, straight up fleet engagement. But I think there is an endless selection of different scenarios you can run. And don't forget, nobody says you have to follow the points values and fleet structure in the book. If you want a battleship with just one escorting cruiser on the table, nobody is stopping you
I recommend you make this your usual forum for BFG; this is where all the ballers are at.