I have, in the past and this year as well, used 2.5 oz little plastic bathroom cups as my seed starters, usually with reasonably good success.
However, this year, I have noticed some resultant problems...
1 - Drainage - Either the holes in the bottom are too small and the water just kind of congests in the soil mix, leading to rot and/or damping off... or the holes are too big and the soil dries out way too fast and the plant dies.
2 - Water holding capacity - While in the past, I've had a somewhat more controlled seed starting/growing area and lived alone so the wife never bugged me about 'running off and spending time with my plants', now I can only get in and water them every so often.. so the soil dries out or becomes a plug.. and when it becomes a plug, water just runs out around it instead of going through it. Let's face it - 2.5 oz just doesn't hold much water when most of it is soil and root.
3 - Tangled roots - When you're starting 10 seeds per cup, those little roots get tangled up and pot-bound quite fast. When it comes time to pot them up, pulling them apart can require a bit of work.
-- Now, don't get me wrong.. In the right environment with the right seed-starting mix, the little 2.5 oz cups are great for starting the seed. They don't take up much space, or soil.. and they will support the plant through at least 4-6" in height. I'm just finding that, if you've got the room, moving up to a slightly larger cup works much better in the long run.
...which brings me to my new best friends -
8 oz styrofoam cups!
There are so many good reasons to use these:
1 - CHEAP - I can go to the local dollar store and buy a 66 pack of them for only $1.00! That works out to about 1.5 cents per cup
2 - INSULATED - I never really even thought about this issue until I got my house and started putting plants out back on the patio to harden off. Thin plastic cups or pots let the heat right in and ended up cooking the roots. These styrofoam cups keep the heat out and keeps the root zone more moderated. I would expect the help against the cold too.
3 - EASY TO WORK WITH - Want to put drain holes in the bottom, or on the side? I have used drill bits and soldering irons, and they both work great. Just like a knife through butter. The root ball comes out easily as well, when it's time to pot up... and if they don't you just tear the cup off and get a new one!
4 - WRITE RIGHT ON THEM - With plastic cups or pots, you either have to use a heavy black permanent marker or something sticky. With the styro, I just grab a roller pen or similar and write on them what's in them.
Now, I also use the 16 oz styro cups as well, but at this point, I don't really have much need to. Most of my plants either get planted out or sold before they get big enough to need the 16 oz size. Then again, if I do need them they're only $1 for about 30 or so.