One could argue that there is a fundamental flaw in the question since poets usually write to inform their audience about awarenesses and understandings the poet believes the audience lacks. Poets don't write to widen their own awareness and understanding but to widen the awareness and understanding of an unpoetical, a pedestrian, an unthinking audience that is unperceiving.
In other words, one could argue that your question should really read: How do the shifts in setting demonstrate the narrator's attempt to widen your awareness and understanding about him and his culture? This is especially true since there is no language in the poem that expresses epiphany, revelation, or sudden or new awareness or understanding. There is only the language of observation accompanied by two changes in tone.
The poet's tone in the stanza one is matter-of-fact. He is simply telling what is. He is telling his preference for how his breakfast is prepared. The first change in tone comes with the second stanza in which he records his minute observations of the sensuous appreciation his aged, wrinkle-handed grandmother has for the ultra-hot green chili (red chili is milder than green chili, which is very hot because of containing much more capsaicin). His tone in this stanza is personal, engaged, appreciative.
The second change in tone comes in the third stanza in which he records his much more remote, disengaged, objective observations of the ubiquitous nature of green chilies in his home region. The tone is distant, almost cold, yet tender as he speaks of "this old, beautiful ritual."
The changing tone illuminates the way in which the expanding setting illustrates widening awareness and understanding. The setting moves from his home, where "Red chile ristras decorate [his] door," to his grandmother's home, where green chili is like "A well-dressed gentleman at the door." In these two stanzas, his awareness and understanding expand from his personal sphere to his family sphere. There is a note of historical expansion of awareness and understanding, as well, since the aged grandmother represents a bygone era of the past, with traditions that may no longer be current among men like him who are educated, refined and more sophisticated in their worldly orientation.
The setting moves from his grandmother's home, representative of cultural variations within a family, to the community at large, where he sees or alludes to a great deal of activity all centering around the green chili. As he observes the activity from afar (perhaps as he drives through on his way to participate in a broader world activity), the setting expands awareness and understanding of his culture by illustrating the central cultural place of the green chili, which is now clearly seen as half of a symbol (the red chili is the other half of the symbol) for the differences of personal preference, of cultural preference and involvement, and for "otherness" within the unified community.
Usually "otherness" is thought of as existing between different cultural groups, but Baca presents otherness as being within his own cultural community. While he is part of the community, with chilies on the door and roof and gracing breakfast, he prefers red (mild) chili while the others prefer green (ultra) chilies: They prefer the deep cultural connections, but he has come to prefer more subtle, more sophisticated cultural connections. This is the awareness and understanding traced by the changing settings. His culture is viewed through a lens that has varyingly colored glass that gives changeable images of what his culture is and must be: It is limited by narrowed world scope, and it must be broad enough to embrace differing preferences, as he embraces his grandmother's differing preferences:
... her sacrifice
to her little prince.
I slurp form my plate
with last bit of tortilla, ...