How to generate a bilinear group of prime order p for key generation
Bilinear group in question is expected to be strong enough, and this depends on group order $p$. Namely, group order should be large enough. So, $\lambda$ is order size in bits. That is, size of the binary representation of order. Order of the group, or maybe just size of the order should be known before generating the group. Notation $1^{\lambda}$ is there to say SETUP() accepts a bitstring of size $\lambda$.