Setting
Also said as Backdrop, Time and place
Where and when the game takes place, and the conditions of life there. It decides what can happen, who is around and what everyone takes for granted.
A good setting generates plot and rules for free. A city under the sea explains its leaks, its isolation and its madness without a line of dialogue.
Say it
“Change the setting from a generic castle to a salt mine that is still working. Now every room has a reason to be underground, and every guard has a reason to be tired.”
Where you’ve seen it
BioShock is set in Rapture, an underwater city built for people who wanted no government above them, and by 1960 it is falling apart. The setting is the argument the whole game is having.
Not to be confused with lore
The setting is what you can see and stand in. Lore is what is known or written about it.