An Application Context is activated when the selected application is running in the foreground and deactivated otherwise.
The button in the bottom right indicates whether the context is inverted or not. If the button is lit-up, this context will become active when any application apart from the selected one is launched.
When any profiles have application contexts specified, Tasker checks frequently to see if one of those applications has been launched. The default is every 1.5 seconds.
If you would like quicker response, or you suspect this is severely increasing your battery usage, you can change this value in preferences (select Menu / Preferences / Monitor from the main screen).