1) When you choose to obtain the Ip address automatically, your router's DHCP auto-assigns IP addresses to the various computers on the network. I dont know about you, but this started creating problems for me from the time of Vista. So, I now assign static internal ips to the computers on my home network. That means that if my router's IP address is 192.168.1.1 (default gateway), then I can assign IP addresses of the 192.168.1.x variety to my computers where x can vary upto 254.
2) As for DNS servers, you can use your ISP's or the google ones (primary 126.96.36.199 and alternate 188.8.131.52) or you can use Namebench to find the fastest DNS servers around.
namebench - Project Hosting on Google Code