USPS First Class mail is the cheapest, to add tracking is $1.05, and insurance costs depends on value. I don't know if I'd bother to insure something worth only $10 though. But that's just me!
I'm shipping some small toys this coming week so I just looked this stuff up- domestic First-Class mail cost ranges from less than $4 to around $7 for small items before tracking.

You can calculate shipping here: http://postcalc.usps.com/ For Etsy, I advise coming up with costs for the farthest place away from you in the continental US plus tracking and just charge that amount. Anything "extra" that's paid will help with cost of tape, boxes, gas, etc.

Yep, it all depends on how much the final package will weigh! (Including bubble wrap and packaging)

I sell primarily lightweight items, so I use First Class all the time.

Insurance will run you $2.10, but tracking/delivery confirmation comes included for free if you generate the postage online (via Paypal, Etsy, USPS.com, etc.) Online postage is also a couple cents cheaper than going in person.

In short, with insurance costs added, if your item weighs less than 7oz or so, you'll be saving a bit of money if you go with First Class. Otherwise, Priority will be your best bet since it includes the $50 insurance for free.

I do most if not all of my shipping through paypal.com/shipnow
It offers the online shipping rate and with my postal scale I can weigh and I can print postage at home.

It is what I use for my business and I am able to offer inexpensive shipping rates as a result since many of the things I create are under 13 ounces and I can take advantage of First Class Mail rate pricing.

$50 of insurance and tracking is included when using the paypal shipping service.

Priority Mail.

Depending on the option, shipping can range from $5.75 to $13 (or more) but there's some cheaper Flat Rate options like Regional Flat Rate that let you ship a lot more in a small box, sometimes for less than $6. Using the online postage services provided by USPS and PayPal can also shave off some of the cost. And the mailman can come pick the package up.

What size and weight are your items?

Edited at 2014-12-07 03:31 am (UTC)

I've actually run into a similar issue when sending out my packages. I make small, hand sewn plushies and started out at around 10$, but came to find that shipping them out was costing me half of my commission income.
I ended up raising my prices slightly to compensate, but it seems to have sent my business into a slump. Haven't had a commission for almost half a year now. :T
I don't go through a third-party selling site though, I advertise on DA and my Tumblr and take payments directly through Paypal.
So I'm also kind of curious if there's a better (cheaper) way.

Regarding the 13 oz rule, I know for certain sites, such as etsy, USPS is allowing first class parcels up to 16 oz (1 lb) now.

If you print postage online, you will save a bit of money since online rates are always cheaper with USPS. You can get a small 10 lb and below scale for pretty cheap, which should be accurate to the ounce. The only real advantage to flat rate shipping is you get free boxes - unless you're packing them with super heavy stuff, you'll almost always pay more using flat rate Priority than first class (as long as it's below 16 oz) or even Priority with your own packaging.

My recommendation would be to save any and all small boxes you can, buy a cheap postal scale, and print off your own first class postage. For example, it costs me a little over $2 to ship a 3 oz small parcel/padded envelope with printed postage, plus you don't have to wait in line at the post office! :D

Edited at 2014-12-07 06:20 am (UTC)

As someone who uses both USPS.com and Paypal to ship things, I can say that I honestly don't know what you're talking about? First Class options are still on the USPS website. Are you possibly referring to the "First Class Large Envelope" option not being available to purchase shipping for online? The reason for that would be because they want to regulate the envelope size restrictions, but they still display it so people can calculate shipping for that option. And First Class Parcel is readily available. There are also Priority options that aren't flat-rate.

And Paypal doesn't charge any sort of service fees for printing shipping labels. I don't know any websites that do, so I'm curious as to which ones you've been using that might do that.

Edited at 2014-12-07 01:59 pm (UTC)

If you're shipping art, I assume you're shipping it with some sort of sturdy cardboard backing, which makes it a parcel. Always select 'first class parcel' or 'package', even if it is in an envelope. The general rule is, if it is rigid or more than 1/4 inch thickness, it's a parcel.

It might be back, I'm not sure. It was about a year ago that I tried to use USPS.com to print first class parcel postage and there wasn't an option, but it may be there now.

Paypal definitely has a First Class postage option, it's just that it's only First Class "Parcel", not First Class "Envelope". It's still cheaper than flat-rate Priority envelopes usually though.

What site are you buying postage through? I would recommend against using the USPS site because last time I tried using it, they weren't letting you do first class. However, if you have Paypal, you can use their Multi Order Shipping tool to buy postage and print it. I print first class postage all the time for prints and small parcels.

Oh, and to answer your second question, insurance is only included automatically with Priority Mail. However, first class automatically comes with tracking now with online postage. I use Paypal to print postage for any non-Etsy orders, even if they didn't pay through Paypal. Just open the Multi Order Shipping tool and select 'create new' and you can input any address.

First Class mail is generally the cheapest for small things. There's weight restrictions to First Class mail, but if what you're shipping is small (under 13 ounces, or possibly 1 lb depending, like kazeno_taka said) then it's your best bet. Also, once again like what kazeno_taka said, tracking is complimentary with First Class mail if you print the postage online. It's pretty simple to do if you use USPS's website* or Paypal.

*Edit: Apparently you can't print First Class postage via USPS.com anymore. Paypal is the best option for printing First Class postage then, though you can still use USPS.com for quick price calculations.

The next step up from that is Priority mail, which also includes tracking as well as some level of insurance. The flat-rate Priority options are really only good if you're shipping heavier items. It's usually better to just weigh the item yourself and print the postage on your own using USPS.com/Paypal, just like with First Class mail. You don't need a special box to ship something Priority either, as the postage label itself will show what it is. There's also other set-rate options for Priority mail other than the flat-rate--such as the regional boxes, which are often cheaper than flat-rate boxes to ship but work in a similar way.

This is all for domestic shipping. International shipping is another can of worms.

Edited at 2014-12-08 12:06 am (UTC)