If you would like to do small diameter circular knitting, you have a couple options.
The two circular needle method is great for making tiny diameter things. You could get as small as you wanted to with down to just like two stitches on this side and two stitches on that side with two circulars.
You can also do the same things with the magic loop. This is the cuff of a mitten. But if it was going to be something that got smaller and smaller and smaller, you could absolutely do that with magic loop. In fact, you normally do.
If you're knitting a mitten magic loop, you can keep the same mitten on here as it shrinks down and down because of your decreases, down to the very tip.
It's easy to see that kind of thing here at the top of my hat. We're going to look at it from the top so you can see how much smaller it gets.
But when you look at it from the side here, you can see that first I was knitting around and around on this larger diameter, and as I got close to the top, I decreased, decreased, down to the very last round which had probably no more than ten stitches on it, and you can do that on the same circular needle as long as you're using either two circulars at the same time or magic loop.
You cannot shrink down to a small diameter on a 16 inch circular because you have to have enough stitches to go all the way around.
So if you want to knit small diameters, use a long circular or two circulars.