When you log into the system there are a set of variables that contain values used "behind the scenes" so to speak. One of those variables is called PATH. You can see your path from a command line if you type this:
The output is a list of directories, each separated by a colon. This list is used to find programs on the system. When you type a command, linux looks at the first directory in the list and tries to find a filename that matches the command you entered. If it can't find one, it tries the next directory, and so on until it does find a match. If it finds a match, it will execute the program. If not, it will tell you it's an unknown command.
FYI: You actually have a PATH variable in Windows too, but it's used far less than it is in linux.