I believe a regular viewer will be more concerned about the message (story) of the video than the quality of the image. On the other hand a viewer that cares about image quality will change the settings to the maximum resolution allowed. So I wouldn't worry too much about this YouTube setting.
One thing that will really make people think your video is bad quality is the sound. If a viewer can't hear the video they will close it. Your audio levels are excellent, your doing an excellent job. Keep the content interesting and audio at correct levels and viewers will watch.