setting
Setting tells us when and where the story takes place.
Settings can be general (19th century in America, in the future on Mars) or specific (2014 in Gastonia, NC; May 22, 4089 in the White House).
Setting influences the plot of the story, the tone and mood, and the characters.
If the setting is based around real events in a real place during a historical time, we can expect the setting to dictate certain events in the story. A story set during the American Civil War, for instance, would likely include plot events based on actual historical events, with the fictional characters interacting with real people from history.
The setting influences the tone (the author's attitude towards his subject) and mood (the audience's attitude towards the subject) of the story. A story taking place on a "dark and stormy night in a crumbling castle by the sea" gives the audience a feeling of foreboding--the expectation that something frightening, tragic, or dramatic will happen.
Setting, to a large extent, determines what a character can and cannot do while still being believable. (For example, a Pilgrim child on the Mayflower in 1620 could not believably break his arm in a skateboarding-and-texting accident.) Setting influences our expectations for the characters. (For instance, a female character in a story set in 19th century America would be expected to be domestic, feminine, and focused on getting a husband.)
Don't believe me? Try taking any well-known story and re-imagining it in a different time or place, and see how it changes the story.