IPhone – When plugged in, does the iPhone use the battery or the external source during heavy use

Don't worry. It will use the wall outlet if that offers enough power which it should using the original AC adaptor.

What if the power is going from 100% down to 99.6%, then back up to 100% constantly?

That was until about a decade ago or so. Modern laptops even don't charge your battery if it is eg. at 98% for reducing unnecessary cycles. Don't bother about your battery in your computer.

If you want to care for your battery, just remember every cycle shortens battery life, no matter if 10 minutes on battery or completely emptied it. The battery has also some natural aging, so it will die after some years even if you never touch it.

Deeper discharge/charge cycles shorten an Li-Ion battery's lifespan faster that shallow ones. (e.g. One 100% cycle is more wearing that four 25% cycles, etc.) Therefore, keeping an iPad or iPhone on a charger or always topped off between short uses will tend to lengthen the battery's total lifespan by reducing the number of deeper cycles per annum, all other thing being equal (such as total time of use).

"Calibrating" has almost nothing to do with the battery lifespan. It's mostly needed to help the battery gauge icon behave more accurately. Once or twice a year is probably good enough for that purpose.