Can somebody explain how capping works if you have a 'pay as you go'
oystercard ? If you only used the buses but then suddenly had to jump on a tube, will you be
charged again until you reach the next capping level, and then so on if you end up going through
more than one zone ?

Yes exactly like that. If you change mode or travel through more zones or
travel at different times the caps will change and your previous journeys count
towards the new cap.

At what point would it be better to buy a 1 day travelcard instead of relying on the capping ?

At the point you know you want to use National Rail as capping only works
on a select few routes. Otherwise the cap will be 50p less than the paper
travelcard from 2006.

There will be no benefit at all in buying a paper bus pass as it will be priced
50p more than a one day bus pass and you will loose the flexibility of being
able to jump on the tube and have it count towards your tube cap.