Okay, some whacked behavior on my end so hope this doesn't end up posted 3-4 times -
Yes, the default behavior is good; dmenu sources the system $PATH and then narrows the list as you type - so typing "g..c..o.." will allow you to select gcolor2 from the list with arrow keys. As long as you can type the first couple letters of the app, you're good (screenshot)

As far as I know, dmenu still only sources the system $PATH, not the $PATH variable in the user's .bashrc so to make your custom $PATH available to dmenu, it will need to be added to the system $PATH. I have -
export PATH=$PATH:~/bin:~/conky
in my ~/.fluxbox/startup and other wm startup scripts. It works, but may be obsolete.
If you're a script-kiddie of sorts, then dmenu becomes a really powerful tool. Menus for whatever you do - i.e. music, movies, coding, internet - can be created and menu(s) piped to dmenu with key bindings.