OK, so we needed a Part 2 because Part 1 got off on a tangent that wasn’t supposed to happen. Part 1 became all about game balance and magic items. This was supposed to be about how magic is viewed by the “commoners”.
But it is important to know how common magic is in your world before you can figure out what people’s reaction to it is going to be. Most low fantasy worlds employ witch hunters, mainly because rare things, like magic, are to be feared.
But what about in high fantasy worlds? Do the farmers just watch golem horses march past their farms and think, gee, don’t see that every day? Or do they gather their children and hide in the root cellar? Well, if your world has the large amount of magic Fletnern has, it’s probably somewhere in-between.
All of this really does depend on the amount of magic you have in your world and whether it is seen as being evil, or dangerous, or just a normal part of life. For me, the “commoners’ (I don’t know what else to call all of the regular people) recognize magic most often when they see it. If they see certain types of magic, they probably react with a “Gee that’s interesting” kind of an attitude. Things like healing magic or healing potions probably get this type of reaction. Though a full resuscitation from the dead should get a stronger reaction.
But if the farmers are out in the fields and a fireball goes of whizzing by their heads, they do grab the children and head for the root cellars. They know enough to afraid of battle magic, even if they aren’t terrified of healing magic or golems or even a necromantic skeleton. This most likely comes from some level of familiarity with magic. If they were completely ignorant of magic, they might not know to be afraid if some sort of colorful fog cloud killer came rolling over the fields towards them. Those poisonous fog attack spells can be pretty devastating, but if they’ve never heard of this before, they might mistake a poisonous cloud for a normal cloud. OK, they may still do this, but ...
So the point is really this: You need to know how commonplace and unexceptional magic is in order to figure out how people will react to it. This is yet another of the “you really need to do some of the world building” things.
But does it matter to the players what the commoners think? It should. There are magical items that show themselves clearly: golem horses, flaming swords, lighted staves, armor etched with glowing sigils, etc. What happens when the party comes to town looking for a room at the inn? Does the innkeeper tell them all the rooms are full? Does the sheriff show up to walk them to the other end of the town? Are the witch hunters brought out to interrogate them?
The reaction to magic in general should be the reaction to the party, at least once they become successful. In most places (low population density places) all strangers are suspect. This goes triple for the ones carrying weapons and looking like they are ready to kill something (i.e. adventurers).
But the stories and myths matter too. If there are stories of foolish adventurers opening old crypts and letting all the evil creatures out, then the people are going to be that much more concerned about strangers. If every myth is about heroes gloriously conquering all evil, well, then maybe not so much. Yeah, it’s almost always somewhere in the middle, isn’t it?
The commoners’ reaction to magic should also be a regional issue. The plantation folks are going to be a lot less trustful of mages then the folks who’s town is centered around a magical university, or probably any university for that matter. But those closer to universities and other centers of young, untrained folks making relatively big mistakes would be those who know the stories of what happens when things go wrong. It is complicated and that’s OK!
One of the better ways to handle it is to make the reaction different for different people, even in the same town, but that puts a lot more stress on you as the GM. Unquestionably, stereo-types are easier to GM than individual.
Still - presentation means a lot. A hero who flies his white pegasi into town for lunch and tips well is not going to be feared as much as the dark and sinister looking wagon driver who has two skeletal oxen pulling his wagon. It may be silly, but simply wearing a black hat or a white hat matters.