The shortcut to merging layers in Photoshop is to press the command key (cmd) and then click on the first layer.
Yes, you will need to merge layers if you want to create a composite image. Merging layers allows you to combine different parts of an image into one larger image.
To merge layers in Photoshop 7, first, open the Layers palette and select the layer you want to merge from. Then click on the Merge button.