Google AdWords is Google's advertising system in which advertisers bid on certain keywords in order for their clickable ads to appear in Google's search results. Since advertisers have to pay for these clicks, this is how Google makes money from search.
The Auction Google AdWords is an auction based advertising model. The auction is the process that happens with each Google search to decide which ads will appear for that specific search and in which order those ads will show on the page.
Each time an AdWords ad is eligible to appear for a search, it goes through the ad auction. The auction determines whether or not the ad actually shows and in which ad position it will show on the page.
This is how the auction works
When someone searches, the AdWords system finds all ads whose keywords match that search. From those ads, the system ignores any that aren't eligible, like ads that target a different country or are disapproved. Of the remaining ads, only those with a sufficiently high Ad Rank may show. Ad Rank is a combination of your bid, ad quality, and the expected impact of extensions and other ad formats.