I hope the title is not too deceiving, but I had trouble thinking of a better one that was not a mile long. I have two desktop speakers, no sub-woofer. Is the general rule o that it is best to have the audio source coming from the computer turned all the way up, i.e. system volume, YouTube slider, iTunes slider. Is it general rule that it is best to then use the physical knob on the speakers for the overall volume as long as the source is up as far as it can go?
It's called "Gain Staging".
(You've already had your question answered, just some random thoughts on the subject)
If you have three sources with level control.
Application: -> System: -> Speakers:
To achieve lowest noise and distortion, (generally) input gain should not have more gain than the output device.
Using a vocal p.a. system as an example... each microphone channel will have an individual volume, the unit will also have a master volume. No individual Mic channel should be set higher than the master volume, (if the Mic's are reasonably even in output). The main idea is to never overdrive the output stage, at the same time, keeping the output stage at a level that does not produce an audible background noise.
Guitar players in the 1950's & 60's figured out using a small amp at max volume would overdrive the output tubes producing a musical distortion, of course, then they started using BIG amps....then BIGGER Amps!
In the digital world we have a bit more leeway... as long as your application volume (youtube, iTunes slider) is below your System master you're good. Most internal audio cards do not put out enough overall volume to overdrive the speakers so the ideal (for me) is to set the speakers at a point where amplifier hiss is minimal, usually around 50%, keep the Windows System master between 75 - 90% and control each application's volume with it's own volume control. But even then it's not going to cause noticeable distortion if the individual volume approaches or exceeds Windows master volume.
Also... your specs didn't mention what internal audio chip you have.
Win-7 (and Vista?) has an (Enhancements) audio section which is a collection of native DSP effects one of them being "Loudness Equalization" This is a form of compression, soft signals are automatically raised up to a set level, loud input signals are squashed down to that same level. Some of these enhancements are provided by Microsoft, some can be added by the audio chip manufacturer by way of the drivers. So... the Loudness equalization can have an effect on your gain staging, something to be aware of.
These are some of the Enhancements available.
-Environment: A reverb space with equalization.
-Voice Cancellation: Takes a stereo recording and puts one side out of phase
canceling all center channel material. (vocal is almost always center channel))
-Pitch Shift: Real time adjustment of pitch
-Loudness Equalization: (covered)
-Equalizer: Tone (treble/mid/bass) adjustments.
To find Enhancements, right click the MS Speaker Icon, select Playback Devices, select your default output device (usually speakers) then click the Properties button. One of the tabs should be labeled Enhancements.
Ap
mmmmm... Rolos!
