Same applies to the concept of "change" addresses. Those familar with how Bitcoin works may know that it is. For the other users, some carefully chosen words of explanation would make the big difference in user experience. Note that, if I understand correctly, the concept of a separate set of change addresses is not a necessity of the bitcoin protocol as such. It is just an implementation variant (also chosen by the satoshi client if I understand correctly) to make tracking of bitcoin flows a little bit more difficult to track. But in principle I could use any address in my wallet, possibly also the paying address itself (?), as change address for a payment.
You understand correctly. A favored address can both be an input and an output in a transaction, however there are other downsides to doing things this way than just making it obvious which output is the change. They are obscure enough to ignore for the average Joe and it's uncertain that they actually present a risk, so for the vast majority of users it's unlikely to be an issue, but it's a poor habit to get started.