Things expand when heated, so why does a slice of bacon shrink in the pan?

Answer

Heat does indeed expand things, because the increased thermal vibrations of the atoms cause them to move further apart on average (there is a small exception for water between 0 and 4 degrees). So you would indeed expect your bacon to expand.

But meat consists largely of water (between 30 and 80%) and that water evaporates during cooking. So your piece of bacon loses matter and becomes smaller. The proof is that after cooling, the piece retains its smaller size.