The outer ear gathers sound waves and sends these to the eardrum, which starts to vibrate. This then causes the hammer and anvil to move, and in turn the stirrup. The stirrup then taps against the oval window that covers the entrance of the cochlea. The tapping of the stirrup against the oval window causes the liquid in the cochlea to move. As a result, thousands of tiny hair cells that hang in the liquid also begin to move.
Through these moving hair cells, the sensory cells transmit signals to the auditory nerve which are then sent on to our brains. Our brains convert these signals into sound. Examples are a car driving past, or a question for the teacher. The auditory system works constantly. The task of the auditory system is to convert waves into nerve impulses, which the brain can then interpret.
The labyrinth is not really part of this. You do not need it for hearing, but the ear nerve is attached to it. The labyrinth contains the balancing organ and this also explains how people with severe damage to their hearing can also sometimes become dizzy.