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I started a new game with Dragon Queen and realized she is a humans faction. Is it meant to be so? Why? Would it make more sense for her faction to be elves?

That is the correct default setting.

I agree with you, it would make more sense which is why see starts with the perks for Elven Archers. I dont think those elves get onto well with the Arethi Elves.
Though Im not strong on Majesty lore.
 
Dragon Queen elves: Female elves. Previous servants of Ardania king, so they get along with humans.

Arethi elves: Male elves. They were supposed to be next servants of Ardania king (300 years rotation circle, between those two groups). Now they don't want to serve anyone, and have their own "Arethi" cult.


Note that this is not any kind of outside Majesty lore, exempt what is available in Warlock game itself, so I may be wrong...
 
Dragon Queen elves: Female elves. Previous servants of Ardania king, so they get along with humans.

Arethi elves: Male elves. They were supposed to be next servants of Ardania king (300 years rotation circle, between those two groups). Now they don't want to serve anyone, and have their own "Arethi" cult.


Note that this is not any kind of outside Majesty lore, exempt what is available in Warlock game itself, so I may be wrong...
There are also the Majesty games ;)