A character is a person in the story. A character goes through conflict, or a problem in the story, and resolution, or the solution. The story wouldn't be interesting without either.
There are major and minor characters. A major character is in the story a lot, and we know a lot, or the most about them. A minor character isn't in the story as often, and without them, the story might still make sense.
Without a setting, the story would make no sense. You wouldn't know where the characters where, or the period of time they were in. There's practically no story.
The setting in this story is on a deserted island. There is no one else except Alec and the black stallion. You know because it says "and they are stranded on a deserted island" in the first paragraph.