how do we understand when to apply permutation formula and when to apply conbination formula?

Try changing the order and see if it affects the count. If it affects it permutation and otherwise its combination.

For example if consolation prize is being distributed then if i am giving it to 3 people it doesnt matter in which order i am giving. It is just combination i.e selection of people.

But if i am giving 1^st ​2nd and 3^rd​ prize then it does matter in which order i am giving.