If you have enough in your PayPal account to pay the entire amount, it will pay with your PayPal balance. If there's insufficient funds, it will default to using your bank account for the difference, but you will be given a screen where you can change (for this transaction only) to use your credit card for the difference.

I try to keep my PayPal balance low so I have the option on a purchase (I get rebates on credit card purchases). You can transfer funds from your PayPal account to your bank account at any time. I don't know whether this changes the fee the seller pays as it doesn't seem to give me that information.

The algorithm seems to be the same for any purchase on-line where you elect to pay with PayPal.