Since you'll be working with actual printing measurements, you can switch the info display to provide inches instead of pixels. In the Navigator/Info box on the right, you should see a small triangle next to the co-ordinate readout. If you left-click the lower left icon (It looks like the prescision cursor, or a '+') you will see a pulldown list of unit types. Pick inches (Or Centimeters if you're one of those metric people) and it will be much easier to make selections and see how large things will be in the end result.
So after you create your photoshop image (and specify the size) can you create a circle of say 1 & 1/8" using the "circle tool"?
The size of your circle selection will also be shown in the same info window, but in the lower-right portion.
If the window is not there, goto Window in the toolbar, then click Info. Then you should have the tool window available. It's defaulted on when you install Photoshop, and it's the uppermost tool window on the right side of the desktop.
I probably will print it at Kinko's or similar... so what would be higher quality? I would imagine 600dpi would be higher quality?
Yes, 600dpi will be higher quality, but the end result will only be as good as the source material. If you are creating the entire overlay in Photoshop without using any outside pictures, it will be 600dpi. Otherwise you may be limited to 300dpi, or even 72dpi which is what monitors are. Keep in mind what you get during printout will be MUCH higher quality than what you see on your monitor.
The other concern is file size. A 28"x14"@300dpi picture is ~97MB, at 600dpi the file size jumps to ~386MB. Unless you have a LOT of system memory, a scratch drive for Photoshop, and a hefty CPU to go with it, you are going to feel the hurt when you want to start applying filters like Brad Lee mentioned.
I'm using a combination of Visio and Photoshop to plan out my control panel. I grabbed the Visio template from the main site here, and imported my Photoshop created pic to see what the end result would be. Since it's easier to work with premade objects in Visio as opposed to re-creating controls in Photoshop it will save me a lot of time in the end. Might be an avenue you want to explore as well...