It's a good question, Steve, and there's absolutely no way for anyone to be certain. I'm looking at whatever indications there are in the text to see what expectations the writer had for his audience - it was almost certainly intended to be read aloud - and any clues as to where the building blocks for the story might have come from. Apart from a couple of passages of praise for the king, there's nothing to suggest it was written for an elite, particularly. It's not exactly realistic fiction as it's all about a knight and adventure and love, with no consideration for how anyone actually lives, day by day, and pays for food and clothing, but I haven't come across anything of that era that mentions any of that stuff. It is, however, entertaining in the way a fairytale is (which doesn't mention much in the way of practicality either). And then again, a lot depends on how you define "folklore". Because of the relative lack of literacy skills the assumption we have to make is that a lot of material was transmitted orally. Is that enough to make it "folklore"? Gervase of Tilbury and Gerald of Wales in the twelfth century both collected stories from people to put into their books, and these stories are generally referred to by scholars as "folktales". The readers of their books, however, would, by definition, be literate, but not all literate people were from the upper reaches of society and not all of the upper reaches of society could read.
We will never know where most of this material came from originally.
There's also the big sociological question of who you define as "folk", and just who is the "elite". As well as what imitated what, when so many medieval narratives are so very similar to oral tales - chickens and eggs come to mind. R S Loomis, who did so much to encourage people to think that everything was "Celtic", was of the firm belief that folk tales were from "plowmen, goose-girls, blacksmiths, mid-wives, yokels”. However, blacksmiths and mid-wives are not necessarily to be grouped in with yokels so again it's all a question of definitions and classifications and ultimately it probably doesn't matter a jot.
This is a bit incoherent (just surfaced after trying to classify a vast quantity of oaths and asseverations and the brain is struggling a bit), but I suppose the gist of this comment is that there's a huge danger in applying 21st century terminology to social groupings and literary genres that had very little importance at the time the material was written down. The survival of the story I'm working on, via chapbooks, suggests that even if it was written for an elite group of people it managed nonetheless to enter the popular consciousness and stay there.
Back to the experts on the Tristan and Iseut story - Juliette Wood is one of the people at Cardiff University I've been lucky enough to be able to consult over the past few years.
On folklorists - there's a huge amount of work been done on the oral-formulaic theory, which looks at how pieces like the Iliad or Beowulf or Turkic epics could have been be put together, and still more on how the nature of composition may have been influenced by technology such as writing and printing. Folklorists like Richard Bauman have worked on all manner of "folklore" (inverted commas because it's such a minefield) including American lay preachers and storytellers in all manner of situations. Some of the discoveries in both fields are useful information for someone like me, trying to work out what may or may not be "folklore" from 900 years ago.
And now it's time for a therapeutic cup of tea.