Short answer is yes, the connection is still encrypted with self signed certificates.
Allow me to clarify a few things about SSL CAs. A certificate authority is not a listening service like a web server. It is simply a certificate that signs other certificates. So when you have a certificate authority certificate installed in your browser it can be used to verify all of the certs it has signed.
If you don't have a certificate authority certificate installed in your browser (or you delete a CA cert from your browser) then it will show up with a certificate warning just like a self signed cert.
If you'd like to play a bit with a certificate authority I have a set of scripts for an internal CA that I run at home.
https://github.com/samrocketman/my_internal_ca
Does that help to explain a little bit? I understand that most classes that discuss SSL explain certificate authorities like they're network services taking connections but that's fundamentally wrong. I say that because when I first learned about CA's I had the same misunderstanding.