When a unit is attacked by another unit, the damage inflicted on the defending unit must be calculated.
The sequence is as follows:
Tiredness
In normal battle, a unit loses one tiredness level for every 2 battle turns (i.e. 2 hours) that it is in the battle, or one tiredness level every 1 battle turn (i.e. 1 hour) that it is engaged in melee combat.
Combat advantage
If two units are engaged in melee combat, the unit that suffered the most casualties in the exchange of melee attacks that battle turn will have to fight at a disadvantage (i.e. -2 penalty) in the next battle turn's melee attacks. The unit that suffered the least casualties will have an advantage (i.e. +2 bonus) in the next battle turn's melee attacks. This represents one unit pushing the other backwards in the press of battle and causing it to lose formation.
Examples
For example, in the first battle turn, Darius' light cavalry unit (led by Xerxes) takes a total of 476 casualties in the battle turn (representing over 100% of its unit size at the start of the battle turn of 400). The unit is annihilated (its morale would have dropped by three levels from good to routing).
Alexander's heavy cavalry unit took 21 casulaties in the battle turn (representing 9% of its unit size at the start of the battleturn of 250) and it successfully charged an enemy unit (doing more casualties than it received), so its morale level would increase by one level, but since it is already good, it stays this way. It would fight at an advantage against the light cavalry next battle turn (though since they have been annihilated, this is a bit academic). Finally, it loses one tiredness level from fresh to normal.
Alexander's Archers 3 unit took 40 casualties in the battle turn (representing only 8% of its unit size), so its morale stays at the current good level. Because it was not engaged in melee combat and has been only in battle for one battle turn, it does not lose any tiredness levels (it will lose one next battle turn).