Dalic's side, runners-up at the 2018 World Cup, beat Japan on penalties on Monday to guarantee at least their third best finish at the tournament.
The coach said on Tuesday he was proud of his team for showing the character and mentality to get this far in Qatar, but knows that Brazil will be a whole different proposition.
"Brazil has (over) 200 million people, we only have four million, so we're a bit like the suburb of a city in Brazil," Dalic said.
"It will be a different game than against anyone we have played so far because Brazil likes to play football.
"If we are looking at it realistically, Brazil is the best team at the tournament, they have a great choice of players, a great squad, it's scary, so it's a great test for us."
Dalic said "it doesn't get better" than playing Brazil at a World Cup.
"Maybe we'd rather it was in the final than the quarter-final though," he added.
"We want to give maximum effort -- we won't surrender before the game. We want to counter Brazil's quality with our own and we want to play football against them."
Croatia have refreshed their squad in the four years since the last World Cup, with only a handful of veterans remaining, including captain Luka Modric and winger Ivan Perisic.
Dalic said this generation should not be compared to the team beaten by France in the final in Russia because they largely included players sprinkled across elite club sides.
"We have already earned a historic result after getting silver in 2018 and bronze in 1998, this is our third best Croatian result at a World Cup," said Dalic.
"I wouldn't draw comparisons to the team from 2018, when you look at our players then, they played for clubs like Barcelona, Inter (Milan), Juventus, Liverpool, Real Madrid of course.
"When you compare it to today, we have six players from the Croatian first division, it's a different team.
"But I take my hat off to this generation, because they are playing great."
Brazil thrashed South Korea 4-1 on Monday with one of the best performances of the tournament so far, but Dalic thinks that his team can fight their corner against the five-time World Cup winners.
"Brazil are favourites, you can tell they have a great atmosphere in the team, they have top world-class players, Neymar is back from injury," added Dalic.
"We have to be very smart in our approach. We can't open up too much against Brazil, but we also can't sit back.
"It's not 50-50, but we are not some big underdogs."
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