Hi,
1. Should we go with default selection of "Central application", Or we should select all components in the list (big list)?
It's on you,you no need to select all components from the list,even you could select the component on the basis of functionalities or features required after upgrade .
For an e.g if you selects Discrete Ind & Mil Products then refer SAP info at Discrete Industries/Mill Products and Public Services - Business Functions (SAP Enhancement Package 5 for SAP ERP 6.0) -…
for its functionalities.
The best i would suggest you to go through with SAP link at
2. If we don't select other componets, will system upgrade all existing installed ECC components while EHP7 upgrade?
Yes it'll & generate stack.xml file as per your component selections.
Hope this will help you.
Good Luck !!