This week's giveaway is in the EJB and other Java EE Technologies forum. We're giving away four copies of EJB 3 in Action and have Debu Panda, Reza Rahman, Ryan Cuprak, and Michael Remijan on-line! See this thread for details.
Is it normal to use LayoutManagers and Containers? Yes, of course. The only alternative is to use a "null" LayoutManager and place components at absolute coordinates. That's a terrible idea because just resizing a window breaks it, not to mention how it will break as the GUI is run on different platforms.
Then you can independently set the LayoutManager of each of the JPanels; they can all be different.
Why do your components "take up the whole panel?" Well, each LayoutManager has its own strategy for laying out components; some of these strategies do, indeed, involve expanding components to fill available space. You need to read the Javadoc for each LayoutManager you use, carefully. JFrames have a BorderLayout by default; JPanels have a FlowLayout by default.
Have a look at the often-neglected Box class and the BoxLayout, which is a sort of improved FlowLayout.