Yes, the "world" in worldbuilding is not necessarily literal. Some sci-fi settings are universe or even multi-universe spanning, while other "worlds" are tiny locations, no more than a town, or even smaller. If we think about something like the Harry Potter universe, you'll find that 99% of the written world exists within the UK, though a couple of other Hogwarts-like academies are mentioned elsewhere, though we never see them. There's more of a hint of the rest of the world than there is an in-depth look. Likewise, the original Warcraft game was purely in Azeroth, just one country, and was greatly expanded in following games, until now World of Warcraft has multiple planets involved.

Miskatonic University is a Lovecraft invention, so the overall world I expect you have in mind is Lovecraft's world plus forty or fifty years. If you're expanding or evolving a pre-established world, a lot of the world is already done, and only requires modification to fit your plot or what other ideas you have in mind. Creating more than you expect to use is useful as a "just in case" measure, but is also useful to suggest that bigger things are involved. This is particularly useful in Lovecraft's world, where the point is always that humans are pawns in a much larger game being played out in the cosmos and beyond.

So although your main setting might be Miskatonic University itself, and you don't expect to stray from it, don't be afraid to do so when you hit a wall or snag. You can keep your world as small as you like, but the possibilities for expansion are always present.

But keeping your world small allows you to go into far more intricate detail in that world than you might otherwise be able to with a larger world. For instance, I have a sci-fi universe-spanning game, and with (so far) 48 named locations, no one location gets too much detail. If you're concentrating on Miskatonic University, you can put in tons of details, from the architecture to class schedules, to faculty, staff, and students... and of course, what deep secrets it's hiding.