Google has build an advertisement system which consists of two mechanisms that work apart, but keeps it together.
Google AdWords is one of the mechanisms, An advertiser is willing to pay Google an amount of cash, if Google will advertise his ad. Google has two types of ad placement, one is on the Google search results page, and the other one is on other person's site that advertise with Google AdSense. the advertiser is paying per a keyword, every keyword has it's own price per a click or 1,000 impressions, the price is usually calculated by competition on that keyword. [competition: how many other advertisers are willing to pay for that keyword]
The other mechanism is Google AdSense, people who own a website can implement ads from Google AdWords.
The advertiser can choose if to pay Google per a click or to pay Google per impressions. click is made when someone clicks on the ad on the website, impression is made each time when a user refreshes the page or other person visits the site, impressions are per 1,000 impressions meaning 1,000 page views.
While the advertiser is paying Google a price that is calculated per a click on a keyword by competition on that keyword, Google is paying website owners by a percentages of what Google receives from the advertiser. That means if the advertiser is paying more per a click for a keyword, than if we will have his ad on our site than when someone will click on it, we will get a percentage of the high paying price from Google.
The ad takes his position on Google search results page if some one will search a keyword that the advertiser is paying for it, usually the more he pays, the more the ad position will go up on the Google search results, the position can also go up if the ad is written better than other competitive ads. Note: the search results page has two columns, one is for regular results, and other column[usually the right one] is for paid ads.
On website ads, the ad will appear if Google robot will find [he searches your site] that the content of the page is related to the keyword, in other words, if you have a text repeating that keyword at least one time in each paragraph, than probably that ad is gonna show up.[if that keyword is showed 5% of the total keywords you have in the text, than it's fine]
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