When peaches are ready depends a lot on your tastes. However, if they're falling off the tree in large numbers, and you want to save all the peaches, it's probably a good idea to start picking them (or you'll lose a lot). You might just put something below to catch them and cushion their fall, and then shake off the ones that are loose; you can let the others ripen longer.
I prefer to pick peaches when they start to get soft (and sweet). You can tell by pressing on them gently. Some people like peaches firmer, though. They'll be more tart when firm. If they're extra firm, they'll be crunchy.
If the fruit isn't large, it might be dropping prematurely. The fruit is probably still usable, though (for cooking, at the very least). It's also possible the tree needed more potassium or something (potassium is supposed to help with fruit size). It also might need more water (although peaches can be pretty drought-tolerant). Mulching might help.