#The Room
This is a huge one and sort of combines with the song, the musician, the performance, and the instrument to create what I often refer to as “the source”. As an engineer, you have control after the source. If you want / need control before the source, you are a lot closer to “producer” (I've determined that engineers have way too little control over the source and therefor I prefer to produce any project worth doing).
When audio engineers say “the room” they really mean the sound of the room. Imagine a tiled bathroom. It has a certain,, signature sound. So does a school gym, a canyon, and a closet. When it comes to recording, the room has an immense effect on the quality of the recorded signal. The difference is HUGE. There are sweet spots in every room that have certain frequency responses. Even guys who record in $5,000,000 recording rooms look for the spot where the instrument sounds the best. There are places, even in that expensive room, where the instrument won't sound that great. Due to a few acoustics principals such as comb filtering (which is way beyond the scope of this article) a crappy room can flat out destroy the fidelity of the sound you are recording.
If you are recording at home, this is your problem. I already know. I don't have to think about it. You'd be amazed at how badly a $3,000 mic can sound in a piss poor room. When a room just sucks the life out of an instrument, what is an expensive mic going to do to help?
For me, I've always had a terrible room. I've been able to limp by when recording vocals or guitar. However, drums are impossible to record in a tiny, crappy room. Especially, big rock drums. While it's not the most exciting thing to spend your money on, a proper room will give you an edge over the competition.
# The Microphone
The microphone is the point where the engineer finally gets a say in the matter. An engineer will take a listen to the source and try to decide which microphone in his collection will pick up the tone a way that most compliments the tone. For harsh sources, a ribbon mic may be used. For thin sources, a large diaphram condenser may be used.
While microphones have a frequency response, they also have a speed. (Preamps have this too). This referred to how fast they react to signals. This generally most important with transient based signals such as drums. Generally, the faster the mic, the more crack it will allow in on snare drum for example. A slow mic won't get nearly as much of the high end attack in the snare, kick, or toms.
Some mics just have character. Character is not something you can just dial in with an parametric EQ. It's kind of like the difference in pickups on a Strat or the difference between a clean Marshall and a clean Fender Twin, only not nearly as obvious most of the time.
Really, selecting a microphone is kind of like selecting the pickup on a Strat. Most of the time, any of the 5 positions on a stratocaster will be just just fine for the recording unless a mega specific tone is required. I'm saying that there are usually two different pickup positions that work just fine for the song and no one would notice the difference one way or another. This is what it is often like when choosing a microphone. These are very subtle textures that are slightly different and you must select the microphone that compliments the source the best.