The action is narrated by a character within the story. First-person point of view can feel more believable and authentic to the reader. However, the reader’s knowledge and understanding are constrained by what the narrator notices and influenced by what the narrator thinks and values.
An observer outside the action of the story shares what they know, see, or hear with the reader. A third-person narrator might be fully omniscient (able to see into the minds of the characters and share what they are thinking and feeling), partially omniscient (able to see into the minds of just one or a few characters), or limited (unable to see into the minds of any of the characters and only able to share what can be seen and heard).