A packet that travels into the firewall with a local IP that is destined to another local IP on the same network; it will be passed to the INPUT chain then to the OUTPUT chain out of the same interface. LOCAL ONLY!
Not quiet. A packet destined for the host itself, not for another IP on the same network. That would go through the forward chain.
Imagine a local DNS server.
Client (10.0.0.2) sends a request to firewalled DNS server (10.0.0.1)
the packet will traverse the input chain, be processed by bind, and then the reply would traverse the output chain on its way back to the client (10.0.0.2)
If the client and server were both attached to a switch.
And client1 (10.0.0.2) sends a packet to client2 (10.0.0.3) the switch will send the packets to the relevant physical port that 10.0.0.3 is attached to, and the packet doesn't get seen by the firewall.
filter/INPUT - is for packets destined FOR the host
filter/OUTPUT - is for packets destined FROM the host
filter/FORWARD - is for packets passing THROUGH the host.
has a flowchart showing the packet flow through the iptables chains.
It is also a good read and gives a good foundation in iptables.