Yes, you are citing the first class parcel rate. PayPal does not offer the flats or letter rates; it automatically assumes you are sending a parcel (which is probably true 99% of the time for eBay auctions).

I question the $1.65 amount, though. The parcel rate is $1.13 for the first ounce and 17 cents for each additional, up to 13 ounces. 2 ounces = $1.30. That's according to the Post Office regs and rate cards; I'll have to keep an eye on PayPal to see if they have it programmed wrong.

As you noted, the large package rate applies when the total measurement is more than 84 inches. That rate is not implicated in these padded envelope shipments.