If you lose steps the shape of your design will be off and as the machine moves from the last known position it will not return above zero after the job.
Normally we use stepper motors with 200 steps per revolution, the electronics behind it can produce half, quarter, eights of a step electronically. every revolution the pulley drags the belt a certain amount depending on the number of teeth. It depends on the type of belt you use what distance it travels in one revolution.
200steps/ number of microsteps = number of steps to travel number of teeth * dispance per teeth.
So now you can calculate the number of steps per mm you need to move your machine in the right direction. More microsteps sounds like more detail, that is partially true as more microsteps reduce the motors power and increase the risk of losing steps.
On the Z-axis you have an extra component if the two pulleys are not the same.
When your machine moves the correct distances you still have to deal with the quality of your spindle. The runoff means that depending of the quality of your spindle it will run off center increasing the cutting diameter of your tool.
On my machine, 500mm with reinforced X axis and Z axis I can cut very precise parts, The "Oval shaped" part on the top is 20mm and 40mm high out of 1.5mm plywood, the rim should have been 2mm wide but is 1.8 on all sides, as this is oon all sides I made the conclusion that my X and Y axis run as good as possible and thet the spindle is wobbling around for .1mm cutting outsides too small and holes too big.
If your part is 1/8 too small but with the right shape I expect your number of steps to be wrong.