1:4 means that the largest "in focus" image you can create on your sensor with that lens is 1/4 the size of the object in real life. If you move closer, you'll either have to zoom out, you won't be able to focus, or both. As Groucho already said, 1:1 would mean that the image on the sensor can be as large as the object you are photographing. Of course, you can print the image at whatever size you want.
There is nothing magical about any particular magnification ratio, but it is a nice way to compare lenses. If you find yourself out in the field wanting to take a picture of a small flower, you can check the magnification ratio of your lenses and quickly see which one will give you the most magnification.
You can increase the magnification ratio of any lens by adding extension tubes or a closeup filter. Extension tubes work by moving the lens further from the camera. That helps because the closer you get to an object, the further back the lens focuses the image. By moving the lens further from the camera, you can get closer to the object and still stay in focus. A closeup lens works pretty much like putting a magnifying glass on your lens.
As for the switch, Master Mason's explanation is correct. Under normal circumstances, it doesn't matter. At times when your lens loses focus and has to start hunting, it reduces the range over which it needs to hunt. There are times when this is really handy, like shooting flying birds or planes. With either of those, when you lose track, your camera tries to focus on the sky, which has insufficient constrast for the auto-focus. In that case, it just starts roaming the entire focus range. When you catch up to your bird or plane again, the focus could be way off. The switch just limits how far off it can get.
