The responsive page display takes priority over any image dimensions as a smart fallback; so mobile users can see a huge image on their tiny screens (otherwise they'd be bombarded by something that'd require them to scroll).
The images are processed with the compression settings you setup via the attachments settings; allowing an 8MB upload will allow a user to upload a huge image, that'll be compressed down.
The thumb max height/width affects the display of the thumbnail, medium I don't believe is used anymore, full is the max size the image can be stored as on the server.
If you look at the image information of my attached image you'll see that its scaled to 200x200 (thumb width) as a 30.73KB image (it was 49KB, so it was compressed); since the image was only 600x600 it didn't reach the full size max dimensions, so it retains the dimensions of the original.
