It is not known when Lagoa was founded, and it was only after 1773, when it was elevated to the status of a town. A hill rises above flat lands where in days gone by, as tradition has it, there was a lagoon. At the top, the tower of a church is visible, above a labyrinth of whitewashed houses. This is Lagoa, where Manueline doorways, windows edged in blue and the imposing turret of the monastery create a feeling that time has stopped and suggest ways of life now long forgotten.

The natural resources of the area have contributed greatly to the current economic structure of the municipality based on agriculture (especially fruit and wine production), fishing, light industry, and tourism. The fishing industry (of the communities of Ferragudo, Benagil, Carvoeiro and Senhora da Rocha), vineyards, and the traditional products of unirrigated agriculture were the principal sources of wealth of the area up to the 1970s. Driven by the abundance of fish, the canning industry at the beginning of the last century broke open the local economy, bringing with it general prosperity and wealth.

From the 1960s, however, tourism has been the principal driver of the area's development and the creation of the infrastructure necessary for the growth of the economic fabric. The most important outcome has been the high level of job creation over the last few decades. This activity has rapidly became the economic motor of the municipality, and has now assumed a permanent place in the local economy. Parallel to the growth of tourism has been the growth of all the related activities, especially in the the construction industry, services, and general commerce.