in Photos, what is the difference between 'favourites' and 'flagged' albums

Photos for Mac does not support flags. Which version of Photos are you running?

Did you perhaps migrate an iPhoto Library to Photos? iPhoto supports flags. Perhaps your iPhoto library contained flagged photos and the iPhoto Flagged album has been migrated to Photos as a smart album?

The only flag that Photos offers is the favorite heart ♡. You will find all photos you tag with the favorite heart in this album.

but I noticed a lot of the photos in my 'Flagged' album also has a heart on them, so I guess it just means that some of the pictures are appearing in both albums if I work on an older picture and put a heart on it, it then will also appear in that album.

Yes, that makes sense. If you mark a photo as a favorite, and it is in some album, you will see the heart in the album too.