The main focus in SEO should be the on-page stuff. Usually this will be restricted to your content on pages. Thin Content is basically the lack of content and quality. Now, lots of sites got loads of well ranking thin content, so why are they not penalized?
There are many factors effecting how pages rank in the SERPs – many of which we wont ever know about. The most obvious reason as of why these pages are doing better then your own, may very well be due to having a better "quality rank" than your site, this "quality rank" is often mentioned as Authority. Many of the sites that are doing so well, are also very old, and have build their trust with the search engines over a longer period of time.
Site Authority can likely be gained from incoming links, keywords found in anchor text, and to a lesser degree from Keywords and Keyphrases found throughout the pages on the site it self. This is however unverified, but those are some of the obvious signals that search engines can look at when determining a sites authority – and it should help to give you an idea about how search engines can work.
Thin content can also be automatically generated junk, or content scraped from other websites. But it can also be manually written content, aimed towards search engines rather than users – the latter usually means that little effort has been put into the content it self, and often the website owner will also be aware that their content is of low quality.
Thin content can also effect otherwise decent sites
Thin content is a huge problem for many internet shops, who often list their products with little or no description, often just a photo and a price tag, with very little textual information – and on top of that, they also often got a messed up HTML source. Its always a good idea to put a little thought into your content, and this might even, in some cases, be enough to rank better than your competitors in the SERPs.
Some younger sites might also suffer from thin content, so if your main content consists of small pages, each covering their own subjects – you may want to consider merging them. But you should also keep in mind that ranking problems are likely to go away with time, given you just keep writing content, and improving what you got. If making smaller topical pages suits your site, then you likely wouldn't want to start combining them, just to make search engines happy.