Can someone explain to me in "NOOB" terms how Time Machine actually works?

Ok so i finally rid of my PC and i am loving my new iMac i7.

Aside it, I have a 1.5 TB external HD sitting there ( with nothing on it )

I was going to use the external for all my movies BUT i already have one for that purpose....

Now when i formatted it, It asked do i want to use it for Time Machine.

I know nothing about Macs at the moments ( Windows user all my life ) so i wasnt sure.

When i did use Windows 7, I never used its built in restore point feature, I always turned it off. ( i am all about speed and having something running in the background that always writes to disk i thought would slow my machine down, so i disabled it )

So i am thinking of putting the external to use for time machine but just curious how it works?

Pretty much if my machine ever goes down, blows up or just crashes i assume once i get a new one or get it fixes i would use my external, and it would restore everything from Photos, Music, Apps, Contacts, etc, etc?

Does it always write to the disc in the background thru-out the day?

I like to delete a lot of stuff from time to time ( installed programs, not like them, delete them ) so does it update itself when i delete also?

Does it work like Windows restore to where you set it to restore at a certain date?