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?
I don't think this even considered a problem. Like the previous comments, low supply and higher demand means higher value of bitcoin. That's what all of us who has bitcoin would like to happen but I know that people who lost access to their bitcoin will become a very rare case in the future. But if it still unavoidable then I'm more than prepared to see a value of 1 satoshi equivalent to $10-$100.