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The Yoneda embedding is an exact representation of a category, but does not by itself reduce the subject to the study of arbitrary functor categories. There are both a size issue and a structure issue.

Let $\mathcal{A}$ be a locally small category and set $yA=\mathcal{A}(-,A)$. For a categorical presheaf $P:{\mathcal{A}}^{\mathrm{op}}\to \mathbf{Set}$, a natural transformation $\theta :yA\to P$ is determined by $x={\theta }_A(1_A)$. Indeed, naturality along $f:B\to A$ forcesConversely this formula defines a natural transformation for each $x\in P(A)$, since functoriality gives naturality along every $g:C\to B$. Taking $P=y{A}^{\prime }$ givesThus the Yoneda embedding is full and faithful, and $\mathcal{A}$ is equivalent to its full subcategory of representable presheaves. The indexing category in the usual version is ${\mathcal{A}}^{\mathrm{op}}$, not necessarily a small category chosen independently of $\mathcal{A}$.

Local smallness makes the values $\mathcal{A}(B,A)$ sets; it does not make the collection of objects a set. For a large indexing category, the collection of natural transformations between arbitrary set-valued functors can itself be a proper class. For example, take the discrete category on the class of ordinals and the constant two-element functor. Its endomorphisms include an independently chosen function $\{0,1\}\to \{0,1\}$ at each ordinal. A small functor category cannot encode this collection without changing universes. The Yoneda lemma remains meaningful when the source is representable because the displayed bijection identifies its natural transformations with a set. It does not make the entire large functor category locally small.

Even for a small category, the representable image is usually a very special part of its presheaf category. If $\mathcal{A}$ is the terminal category, its presheaf category is $\mathbf{Set}$, but its representable image consists only of a singleton. The presheaf category has all small categorical limits and colimits, whereas an arbitrary full subcategory need have almost none. The Yoneda embedding preserves existing limits because representable functors preserve limits. It generally does not preserve colimits. For example, the coproduct of two singleton sets in category of finite sets is a two-element set, but evaluating the proposed presheaf coproduct at a two-element set givesThe pointwise coproduct therefore leaves the representable image. Identifying which presheaves are representable, and which ambient constructions return to the original category, is precisely substantive category theory.

The representation is nonetheless powerful. The Yoneda lemma replaces a morphism by all its probes, converts a universal property into a representation of a functor, and makes the presheaf category a natural place to add formal colimits. A small presheaf category is the free free cocompletion under small colimits: every presheaf is a colimit of representables indexed by its category of elements. But this is a controlled enlargement of the category, not an identification of its original objects with all functors. The stronger conclusion in the proposed assertion therefore does not follow from the full-faithfulness statement.