PayPal's shipping settings only apply to using PayPal's own shopping cart service; our cart just passes our own calculated shipping cost to them along with the rest of the order data.
Our default Shipping calculation queries the USPS rate API directly, and USPS does indeed rate by the ounce. Most of our original Merchants (who only shipped one item at a time or only had one product line to sell at a time) just wanted the cheapest USPS rate that was universally-applicable (no specialized services with rules/conditions/limitations like Media Mail or Parcel Post), so we query USPS for First Class and Priority Mail rates and apply whichever rate is cheaper.
If you are using this standard USPS Shipping calculation method (and have not overridden it with any custom per-oz. Domestic or Int'l rates entered in Seller Admin), if your shipping zipcode is correct, and if the weights of your fully-wrapped product units and fully-padded empty container types are all accurate, then our Shipping calc will always return an accurate USPS cost for whichever is cheaper between First Class vs. Priority.
If you would rather use flat-rate Priority Mail boxes, you can specify those flat rates as the cost for the various container types and leave your other per-oz. rate and weight settings set at 0.00, then configure each product's shipping with how many units of that product can ship in which type of container.
You may find it useful to know that the Tube container types can combine different products into one parcel. This was intended to allow various posters/art of different sizes to be shipped together in one tube of the largest size ordered, but you can also take advantage of this (even if you're not literally shipping in tubes) to combine products into one parcel for shipping.
Also, it may be helpful to know the basic formula we apply to calculate shipping:
((cost per oz.) X (product wt. + package wt.)) + (package cost) + (handling cost)
The (cost per oz.) part would be determined either by standard USPS rates (if you have your zipcode and no custom shipping cost per oz. entered in Seller Admin > Cart Shipping Settings), or otherwise by a flat per-oz. rate you specify for Domestic or for International shipping. If you are using a custom per-oz. rate instead of USPS rates, there's no reason you can't actually specify a per-lb./kg rate, with product and container weights configured on that same basis as well, since we just multiply your custom rate by your combined weights.
While UPS and FedEx also have their own rate APIs, they each have their own extensive and proprietary documentation that we would have to read and learn thoroughly first, and while it would be technically possible to modify or extend our codebase to integrate with those at some point (and we recognize the desirability of this), "possible" does not mean "quick" or "easy". Our foremost concern is that we must never modify our codebase in a way that would break any existing functionality for our existing Merchants, and never introduce any new features haphazardly that have not been thorougly tested and ensured to work properly, both on their own and in combination with our other functionalities. Adding UPS/FedEx will need to be approached with painstaking care and strategy when we do finally decide we are ready, able, and fully-informed enough to tackle those hurdles.
Finally, we do have some enhancements to Shipping in the works that should give you more fine control over shipping options and charges; look for formal announcement of any new features in our Service Status & Updates forum category here:
http://www.e-junkie.com/bb/forum/6
