AdSense is an application of AdWords beyond Google.com
Making “sense” of AdSense means understanding that it is really an offshoot of the older Google model, AdWords. But they are not the same thing.
Google AdWords
If you have ever searched on Google, you have seen AdWords.
Google AdWords are the small text ads that are displayed on the side of the search results in Google. These ads are contextual of course – in this case the context is the search terms you entered. The ads will be served based on what you’re looking for. So, if you do a search on “printing services” you will get ads for printing services along with your search results!
How does this generate money for Google and the advertisers?
Google AdWords works on a model known as pay-per-click. When someone clicks on an AdWords ad, the advertiser of that ad has to pay Google a certain amount. It’s easy to track and fully automated.
We say “certain amount” because that amount is different all the time and is subject to market forces – in this case, bidding. Something has to determine the placement of those ads, and what determines it is how much the advertiser offers to pay per click. When you submit this kind of ad to Google, you submit it with a bid – which is compared to other bids for similar keywords. It’s an auction style process.