The thickness of your yarn and needles will affect your dress -- the thicker the needles, the looser the knit. The finer your yarn, the thinner your resulting "fabric" will be.
For this dressed I used size 8 needles and a thinner, textured yarn: a beautiful nubbly purple and blue cotton/acrylic blend, which actually resulted in a tight and relatively thick "fabric" that is very soft.
I cast on 60 stiches, making the width about 20 inches, and knit row after row until it was the height I wanted: about 13 inches. Then I cast off.
I made the two straps 4 stitches wide and about 6 inches long.
After that, it was a simple matter of folding the large knit rectangle in half and sewing the two shorter ends together.
I used 1/2 inch elastic sewn to the seam at the top of the dress (the cast off end, since the way I knit that end is usually less stretchy and my plan was to gather the elastic end anyway) and then folded the "fabric" over the elastic and sewed that down on the inside of the dress, gathering it up so that the top of the dress is at least a couple inches narrower than the bottom (the dress I made should fit babies 2-8 months loosely as a warm play-dress, and then up to 1.5 years as a more fitted sweater vest). When I came full circle on the elastic, I sewed that in securely and finished off the folded down bit of the sweater so that you can't see the elastic at all (still working on the inside of the dress).
Then I sewed in the straps, attaching them to the inside edge of the dress.
I finished the whole ensemble off with a couple of decorative butterfly buttons - adorable! The straps could easily also be made to be adjustable with functional buttons.