As you seem to suspect, that switch puts the Reader in a standby mode. This mode is essentially identical to the mode it's in when you're reading (but not actually changing a page), except that the display is blank (obviously) and the Reader ignores all its buttons and controls except the power slide. Incidentally, this behavior is the reason I feel like it's dumb to have to turn my Reader off on an airplane during take off and landing: it's
really not any more off when it's off than it is when it's on, so it's clearly not gonna bother the plane if I kept on reading, but I also have no intention of giving the flight attendants any grief, so ....
The battery drain you're noticing is normal, so if you're concerned that something's wrong with it, don't be.
If you want to, you can turn a 505 "off" off in one of the utility menus ... I can't recall offhand exactly where. The same thing can be done on a 500, via one of the hacks available in the Hack Builder utility that's in the forums.
However, if you do that, you'll have the full boot cycle when you turn it back on. I played with this on my 500, using the hack, and discovered that the battery actually drained
faster doing that, unless I left it for a
long period of time. I was turning it "off" off at night when I went to sleep, on at lunch time, and then "off" off again until evening. The rule of thumb I came up with was that unless I was planning to leave it for several days (like that's gonna happen) that the booting sequence took more juice from the battery than just leaving it in it's suspend mode would.
Your mileage may vary, of course, but I hope that's helpful.