The "Per machine only (fails if user is not an administrator)" option sets a special behavior for the installation package on Vista: when installing the package, the user will see an Elevation Prompt dialog that will ask for administrator privileges.
If the logged user is member of the "Administrators" user group, he will be asked to allow or deny the installation, otherwise he will be prompted to provide credentials as one of the computer administrators.
Also, the installation will be performed for all the users if the necessary credentials are provided.
The "Run only if user has administrator privileges" predefined condition will make sure that the installation will not run (not even the User Interface) if the user which runs the package doesn't have administrator privileges.
This is only a launch condition and it doesn't affect the Installation Type (per-user or per-machine).