Definition: a highly admired person or thing
A bee's knees are, like our own, joints between each leg's femur and tibia. While we have only two, they have six (though they're not often referred to as such in technical contexts). And what knees they are! Splendid enough that they have, since at least the 1920s, conjured by mere mention the idea of something excellent—specifically a person or thing to be greatly admired.
But it cannot be ignored: a bee's knees are also very, very small. In fact, their size was the first thing English speakers associated them with, as best we can tell. In earliest known use, the term bee's knees was applied in similes to emphasize just how little or insignificant something was:
"Take a slice; there's a good fellow." "Well, if I do," said Ned, "let it be only the bigness of a bee's knee."
— James Grant, The Great Metropolis, 1836