Learn Polish: Kupuję mleko w małym sklepie. - I am buying milk in a small shop.

This relates to our current lesson! The phrase refers to a location, requiring the Locative case. Since sklep (shop) is a masculine noun, the adjective modifying it takes the masculine Locative ending -ym, becoming małym.

Why is there an 'i' in sklepie? The base word is sklep.

When putting a masculine noun that ends in a hard consonant (like the p in sklep) into the Locative case, we usually add -e. To make it easier to pronounce, the hard p softens to pi before the -e, resulting in sklepie.

Why are we using the Locative case for 'small shop' at all?

The preposition w means 'in' or 'inside'. When w is used to describe a static location (where an action happens, rather than motion into a place), it forces the following words (małym sklepie) into the Locative case.

mleko is the object being bought. Why didn't its ending change?

You are right that mleko is the direct object and requires the Accusative case. However, mleko is a neuter noun (because it ends in -o). In Polish, neuter nouns look exactly the same in the Accusative case as they do in their basic dictionary form.