Arda is one of several planets orbiting a single yellow sun. It has roughly the same physical shape and composition as the earth, and occupies a similiar place in its solar system as the earth does in ours. Arda is in turn orbited by a moon of similar size and appearance to our own. As a result of these parallels, Arda is very much like the earth: there are seasons, tides, sunrises and sunsets, polar ice caps and equatorial jungles.
Where Arda differs is in what lies above the air that everyone breathes. As you rise higher above sea level on Arda, the atmosphere does not thin out: instead, the air is increasingly mixed with ether. Ether is, essentially, light air: it rises, while air descends. People who are used to breathing air find themselves increasingly short of breath as they climb higher up a mountain, because they are breathing air mixed with ether. The highest mountains are surrounded almost entirely by ether mixed with only a little air: in these places, it is possible to suffocate even though your lungs are full. Giants and other creatures accustomed to breathing ether and not air have a similar problem if they climb down towards the ground, which is why they live on mountaintops and clouds.
The space between Arda, the moon, the other planets, and the sun is filled by ether. Because ether is like air in most ways, a firm breeze can fill a flying ship's sails or propel a cloud castle towards the moon or beyond. Fire burns in ether as it does in air, which is why the sun burns: if there was a vacuum around the sun, presumably it would be snuffed out.