You know, I’m sure someone has asked this many times in the past, but, arms just don’t deform like this yeah? :no: What am I doing wrong? I mean, obviously theres more to just putting armatures there and applying them to the mesh cus that dosnt work 
Eggyolk,
For starters, check out the tutorial - first link.
http://wiki.blender.org/index.php/BSoD/Introduction_to_Character_Animation
More specifically:
http://wiki.blender.org/index.php/BSoD/Introduction_to_Character_Animation/Upper_body_weight_painting
General weight painting:
http://wiki.blender.org/index.php/Manual/Weight_Paint
Best of Luck!
For deforming at the elbow, as well as the hip, and even the knees, and shoulders, you need to use shape keys
check out this tutorial
http://kokcito.tk/rvk/ipo.html
this tutorial has the answers you seek
another approach:
http://www.jpbouza.com.ar/ENG/blenrig.html
If the site is down go to:
http://blenderartists.org/forum/showthread.php?t=107197&highlight=blenrig+1.2