There are three starting 'difficulty' levels, as well as an adjustable difficulty level. What exactly do these choices make in the game?
There are 3 game style modes: Action, RPG and Story.
Action makes all dialogue choices automatically, predetermined by Bioware. Combat is manual, similar to the previous games.
RPG is business as usual, allowing you manual dialogue choices and normal combat experience.
Story is manual dialogue choices, with minimal combat. Story mode is locked to the Narritive Difficulty.
The actual adjustable difficulties are similar to previous games:
To answer your question succinctly: Mode determines manual or auto dialogue and combat difficulty. The adjustable range modifies combat for RPG and Action modes. Story mode is locked to Narrative.