Two things, selecting the version of the operating system provides compatibility, not performance limitations. Just as newer hardware can't run old OS's, you have to select compatible virtual hardware. That's independent of performance, which a handful of special exceptions (e.g. DOS requires a system clock that matches what the OS expects).
As for resources, the rule of thumb is to never assign more than N-1 cores to the VM, where N is the number of physical (not hyperthreaded) cores. Likewise, you always want to leave at least 4GB of RAM for the host OS. If you exceed those limits, you'll starve the host for cycles (as Scott said) and actually slow down the whole system. If you're running other things on the host, or are running multiple VM's at once, then you'll want to lower those limits.
As for dynamic, that wouldn't work because just as you can't insert and remove RAM or CPU cores while an OS is running on hardware, you can't do it virtually either.
