I understand that my question may be vague. I'm trying to figure out what is meant by the term "party level".
I have a party containing 7 players and currently all are at level 1. I was picking monsters for a level one party but adding in enough of them to accommodate the 7 players. Did I do that correctly or is as I was told somewhere else that in truth my party level is a 7?
You have a level 1 party.
When designing an encounter for this party you should select threats around level 1 (see page 56 of the dungeon masters guide for details). You want threats with a level or 4 of the party so that the player characters can actually hit monsters, are only hit by a reasonable number of attacks in return, and it takes a reasonable number of hits for either side to defeat an opponent.
The number of players in the party does not change the level of the encounters they should face. It does however change the experience budget for those encounters. That is the mechanic you should use to add an appropriate number of enemies to each encounter (or upgrade some of them to solo or elite templates without changing their level).
Similarly treasure rewarded to the party should be around the party's average level but the number of items should change based on the number of characters in the group.
Party Level is a concept dating back to the late 1970's - in general, tho', it was popularized in D&D 3E (where it hit a form close to that used in 4E). The term Total Party Level is used in Alston's D&D Cyclopedia (pg. 100-101), and isn't an average, but is the first formal rules inclusion I can find.
While not explicitly defined in 4E PHB1, DMG1, nor MM1, it's used in DMG 1 in the section on encounter balancing. DMG page 31 notes the "default size" of a 4E party is 4-6 players, and that encounters should be based upon this.
Given that 4E also presumes player characters will adventure in groups of the same level, and will level up at the same time, no math was expected to be needed.
So, generally, a balanced encounter is a number of monsters equal to the number of PC's, and of the same level as the party average level. (See 4e DMG p 104 for variations on this.)
But in prior editions, it was forumlaic. 3.0 and 3.5 used the explicit average of PC's levels. As noted before, Cyclopedia used the total level of the party members, rather than an average.
The party level is used to determine what a "suitable threat" is for the party. An encounter with a single opponent of a threat level equal to the party level should be a "fair fight" - which means, the players are likely to win, but expend a reasonable portion of their expendables, including HP and ammunition.
In general, such balance is only for those who treat the game as a form of miniatures gaming; as one gets into story mode, balance (and party-level based calculations) become less important.
The "party level" is the average level of the party. So if you ever end up having characters of different levels in the group you need to add up the levels and divide by the number of players in the party. In a group of a level 3, two 2s and a level1 character (as I had when I figured this out) the party level is 2.
That said for large groups such as yours your best bet is going to be to have at least as many monsters (not including minions) as there are members in your party, if not more. I know that at least with my group, even though there are only 4 party members they fair well against monster battles with 5-6 enemies minions not included. With 7 party members and a larger group of monsters it will take a while to go through the turns in combat, so I think Jonah had a great suggestion when he said make a few elites and throw a solo creature in as well. This will increase the difficulty with out making combat take any longer than it needs to be.
