We use concepts to categorize the input we receive: color (red, blue, green), government (democracy, communism), and emotion (happy, sad).
Our brains amplify and downplay the differences between categories to simplify our world. There is an example in the book How Emotions Are Made showing that we perceived rainbows as defined bands of color when they are actually a continuous spectrum that has no clear categorical boundaries.
Step one in learning is to notice and name. We cannot categorize input if we haven't learned the concepts and categories. The granularity with which we understand concepts and categories is essential to developing a nuanced understanding of the world.
We also have goal based concepts which are incredibly flexible and adaptable. Things from many different objects can fit into "things I can defend myself with" and many different activities can fit into "things that are fun".
Sometimes things overlap and we need to adapt our categories on the fly: When categorizing fish you are unlikely to ask for a goldfish at the meat market and equally unlikely to ask for a salmon filet at the pet store.
With words we can create patterns which can't be directly observed in the world, patterns of concepts that exist in other people's minds. We use the powerful tool of conceptual combination to make limitless ad hoc concepts.