Amazon EC2 is a xen vps. The difference between this and any other xen vps is primarily that you pay for resources in a more granular fashion (storage, bandwidth, hourly use, support) and how it integrates with other amazon cloud services. It's more complicated and more expensive generally than a standard vps with similar resources, so unless there's a specific feature or amazon service you need to integrate with, you're likely better off with a normal VPS.
Yes. In some ways this is good as you can pay less for a resource if you under use it, where by with normal hosting you pay for full utilisation whether it's used or not. If you want to try it out you can get an EC2 micro instance free for the first year.