I'm generally the 'Graphics<Gameplay' type of guy, but this isn't always true (Last Christmas I made the mistake of playing Twilight Princess immediately after Half-Life 2). There are a few factors that I'd like to point out...
Competiveally speaking (8-bit against HD disc games is a one-sided fight)
Utilization (Is the game in particular meant to be realistic-looking [HL2], or artistic [Okami... or something else like that])
Limitations (How good can graphics possibly get before causing problems?)
First, there's competition. Like them or not, graphics are still a major selling point in the gaming industry. You just can't get the important 'visual appeal' audience with a 16-bit (or something) system (unless you add it as a side feature, like the Virtual Console). You need to at least LOOK LIKE you can keep up with modern technology and trends, and not the company-equivalent of that crazy old cat guy down the street.
As said before, there's the utilization of the graphics and special effects. There are, from what I've seen, four types of graphical directions for games. There's the as-realistic-as-we-could-get-it look [Type A] that tends to be a real attention-grabber (particularly for advertising and 'looking over players shoulder at friends house' quality). Even in here, there's several directions that the graphics can take (I remember seeing the model detail in HL2 for the first time). This is is also the type that may cause problems if you didn't spend $6,000 on a fancy gaming computer.
There is also the 'alternative look' [Type B]. These games tend to not go for, and even try to avoid, realistic graphics. While I'm too tired to research such games, the ones I can remember right now are Viewtiful Joe, which attempted a 'graphic novel' or something approach (I hated that game)... and Castlevania, a series that was just made for hand-drawn 2-D graphics. People tend to complain about Type B games, but that's usually because they aren't Type A games.
Type C is the kind of game where you're too distracted by the game itself to really notice the graphics. I know this happened to me when I rented Warioware: Mega Party Games... I was just too weirded out.
And finally, there's the dreaded Type D. This is where it looks like the graphics department of the company spent one afternoon on the game, said 'good enough', and called it a day. The kind where everything is so sloppy looking that you either barely know what's going on, or the lack of detail brings down the whole game. Type D games are generally the third-party game that might have a tiny corner in a review section of a magazine, and nothing more. Luckily, I can't think of such games. I think it's because I have taste.
(Wow, the utilization section lasted longer than I thought!)
The last factor is how far one can go with graphics before it causes problems for the common gamer. If the graphics are so great, then how much action can occur at once? There's the all-too-common issue with processing in MMORPG's, when you have to enter a heavily populated city. And I don't know about the rest of you, but some parts of HL2: Episode 1 made my computer run at less than 1 frame per second (And yes, I DID lower the graphics settings). If commonly used graphics are high in detail, then wouldn't special effects cause some kind of meltdown? It all depends on the player's entertainment budget, and frankly, not all of us have the latest uber-HD-TV with 500-speaker surround sound and [format of choice]-compatable disc reader. My priority is 'decent running speed > graphics'.
Keep in mind that most of this is just my opinion. And with every opinion, there is opposition, and that if you don't agree with me, it's not the end of the world. And if it was, that would be a really stupid way to cause the apocalypse.