How does the way that other characters view Don Quixote affect the way his character develops? If the other characters think he's mad, how does this affect him?
Don Quixote, particularly in the first part of Don Quixote, changes extraordinarily little in response to the actions and words of the characters with whom he comes into contact. Taking the content of the books of chivalry he devours as reflective of the world around him allows Don Quixote to interpret everything he encounters within the context of those books.
Early on in the first book, Don Quixote realizes that in order for him to embark on knightly errands, he must first become a knight. He stops in at an inn, believing it to be a castle. In this situation, the occupants of the inn clearly see him as mad, but they humor him and his request in the hope of getting a laugh at his expense. Their behavior only reinforces his worldview, rather than dismantling it in any way.
Later, Don Quixote and Sancho Panza come upon a party, two of whom are Benedictine monks. Wearing their characteristic black robes, Don Quixote sees them and believes them to be dark enchanters. In both examples, neither the occupants of the inn nor the Benedictine monks directly call Don Quixote mad. They certainly think that he is, but the fact they do not address him directly does a great deal to reinforce his view of the world, and as such he does not feel he must change. He does not really begin to develop as a character until the second part of Don Quixote, when his faith in the books of chivalry starts to crumble.