1. The variables are just place holders for values. The connection between the values and the names is either made via abstraction (see 3 below) or is held in the environment of a statement. We'll explain more later.
2. Applications (aka combinations) are a model for function application. For a lambda expression like (E1 E2), the first item (called the rator, from operator) is applied to the second item (called the rand from operand). For example, imagine the "square" function being applied to the number 3. (square 3) would be 9.
3. Abstraction is a model for function definition (but does not bind the definition to any name). The variable is the parameter of the function, and the expression is the body of the function. The variable binds any occurence of that variable in the body of the function. The abstraction is the function which takes some argument, and creates a new expression by replacing this argument for any occurence of the variable in the body.
Some examples:
1. \x.x is the identity function. For any argument it returns an expression which is the argument.
2. \xy.x is the "first" function. It takes two arguments, ignores the second and returns the first (argument).
3. \f.\x.(f x) is the function which takes two arguments and applies its first argument to its second argument.