There is a long and really excellent discussion of the setting of this book in the eNotes summary. Please follow the link.
In general, this book is set at Hogwarts just as each of the first six books in the series is set mostly at the school. However, this book's setting is different in that many important parts are set in the village of Hogsmeade. This is the first year that Harry's class is allowed to visit the village and much of the action occurs there.
For example, the climax of the book occurs in the village. This is the part in the Shrieking Shack where there is the big confrontation between Harry and his friends, Snape, and Sirius Black.
So the setting for this book is slightly different in that it includes Hogsmeade. This shows that Harry and his friends are growing up -- their world no longer consists solely of home and the school.
why i can't read all the text in the source. It says joins the enotes to access the content. I've already joined it. Why I can't read it. :(