There will be a fixed number if Bitcoins, and people, because of human error, will accidentally lose Bitcoins every now and then.
This must mean that Bitcoin will eventually seize to exist? Or at least shrink to minimal amounts, when it shrinks to a certain level, it will no longer be useful.
Is this correct?
You are partially correct. If people continue to die with their private wallet sees and password, the amount of Bitcoin actually in use will keep on decreasing with time.