When reading the AKC standard there is no minimum size given, just the fact that they shouldn't be over 7 pounds. A picture would help us give you a better answer. Don't listen to people on the street though. I'm always asked if my dog is a silky. Although pet yorkies and silkies look very similiar, my yorkie is only three pounds which is REALLY small for a silky. Many people don't know their dog breeds or they may be comparing your dog to a dog that belongs to someone they know.
As far as breeding, it should only be undertaken by someone who knows what they are doing or has access to someone who does. A lot can go wrong which can mean losing your dog or running into some very expensive vet bills. If you don't breed her, get her spayed, the sooner the better. We lost a dog to pyometra which is a uterine infection. The more heats your dog goes through, the greater the chance of her contracting this. Here's a link so you can read all about it:
http://www.marvistavet.com/html/body_pyometra.html