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Is a product and instance of a product type? Like you'll have a media store where Books is a product type and 'The Definitive Guide to Drupal 7' would be a product? Product display would then be literally a way of displaying your product?
I've been trying to get some clarity by reading tutorials and watching videos and somehow it's still not clicking with me.
Product types is like node types. The main thing about is that you can tell them apart and you can put different fields on them. A product type could be books, but if your books and board games are essential the same (they need the same data) they could be the same product type, where as t-sheets would need to be a different product type, since you probably want to add data for color, size, model which doesn't make any sense for books and games.
A product is an instance of a product type, meaning it could be a green medium sized t-shirt for men, or 'The Definitive Guide to Drupal 7', along with price etc.
Product displays is the main way of displaying your products to the end user, since out of the box products can't be displayed. For this commerce has built the product reference field and the add to cart form and such features to do the trick. Meaning that you can display your products on other entities. Most often you want to use nodes for this, but in theory you can use Profile 2 with the profile entity, to allow users to sell stuff on their profile with a product reference field.
You could also use Views to display products to the end user, this is what I did with my first Commerce site, where Commerce wasn't matured yet. I wouldn't recommend this, as you loose the ability to combine products with the add to cart widget. But if you are selling antique furniture, where every product is unique, this could work out well for you, as you only would need to create products and not product displays as well.
To elaborate a bit on googletorp's comment, this model is counter-intuitive to most people, but is based on the retail model, where inventory and product display are separate.
In a store, you might have a product that you have purchased, but for whatever reason, is not on display yet, on the showroom floor. Or, you have several products in several sizes, but all have separate skus.
You create a product on the backend for each SKU, and then display several (s,m,l,xl) as a variation, in the actual product page. So, you have a single product page, that will display four individual products.
I personally don't care for the model, or at least think the process should be linked to a product display node creation out of the box. I love Commerce, but think it has some ways to go in terms of usability/natural way of product creation for stores with <100 products.
For a visual, workflow-wise: Create--->Products -----> Product Node (Display) ----> Category/Taxonomy Term Association
Hopefully, this makes sense.
