Does that mean once the reduced size package is deployed onto the client it will request full.zip for AV content either from the SEPM or GUP server if I am understanding it right ?
Yes you are right, once you have installed reduced size package in a machine it will either download the full.zip from SEPM or GUP or LUA, based on the settings that you have configured in live update settings policy.
Or the only difference between both the standard and reduce package is the size of initial package that will be installed after that the process of update is the same for both standard and reduce size package ?
post installation initially the reduced size package will have less protection meaning it will contian only the recent defintion, but once it is upto-date there is no difference between the standard client and the reduced size package.