--- OK, let's get into it a little deeper.
Let's take the stuff on the right hand side and make it look like this:
E1 | [R1] | +----E2 | [R2] | GND
Where E1 is a 1VPP 1MHz sinusoid, R1 is the sum of the resistance of the generator and the resistance of the fixed resistor, R2 is the resistance of the LDR, and E2 is the voltage developed at the junction of R1 and R2.
Further, let's say that R1 is equal to 1000 ohms and that the brightness of the LED has been adjusted with the DC supply in order to make the resistance of the LDR equal to 1000 ohms.
Under those conditions our circuit will look like:
1V | [1000R] | +----E2 | [1000R] | GND and the voltage at E2 will be equal to:E1 * R2 1V * 1000R E2 = --------- = --------------- = 0.5VPP R1 + R2 1000R + 1000R
Let's make the LED a little brighter by cranking up the power supply until the LDR's resistance falls to 900 ohms. E2 will now be equal to:
E1 * R2 1V * 900R E2 = --------- = --------------- ~ 0.474VPP R1 + R2 1000R + 900R
Likewise, if we make the LED a little less bright so the LDR's resistance climbs to 1100 ohms, E2 will be equal to:
E1 * R2 1V * 1100R E2 = --------- = --------------- ~ 0.524VPP R1 + R2 1000R + 1100R
Since we've changed the amplitude of the signal at E2 (let's call it the 'carrier') by changing the resistance of R2, we have _modulated_ the amplitude of the carrier, and we have an AM signal at E2.
Now, let's adjust the DC supply so that E2 is again 0.5VPP, and now let's crank up the output of GEN1. What do you think is going to happen?
OK, I'll tell you. When the AC signal on the secondary of the transformer _adds_ to the power supply voltage the LED will get brighter, and when it _subtracts_ from the power supply voltage it will make the LED a little dimmer.
Remember from before what happened when we made the LED brighter and dimmer? Right! We amplitude modulated the carrier. The same thing will happen now, except that the modulating frequency will be 1000 Hz.
Don't believe me?
Build it or simulate it.
-- John Fields Professional Circuit Designer