A component is an individual part of an application monitor. An application monitor is an application template applied to a node. Each template (and monitor) is made up of individual components that monitor different aspects of an application and/or server. In this case, the default alert will notify you if any particular component in any application monitor goes down.
If I were you I'd be careful about enabling that one unless you are just writing to the Event Log. Actionable items off of default alerts in large environments can create a whole lot of noise. I'd set up alerts for specific application monitors, or groups of application monitors, in order to reduce the number of alerts that actually require your attention.
Whenever I do consulting gigs (which I do as a sideline to my day job -- I know, I need to get a life!) I always disable any 'default' alert actions to send email, etc. and work through the "what is important" discussion with a customer. It is usually far more useful to get a handle of the really critical events first then to seek out the events that are noisy.
Does that help?
