“Hal Varian, Google’s chief economist, gives an in-depth overview about how the ad auction works. He describes how the auction system works so that consumers always see the most relevant ads and advertisers get the most value. He also provides insight into the key components of ad rank: bid, quality and formats, and the way all of this works together to determine your ad’s position and cost.”

http://www.youtube.com/watch?v=PjOHTFRaBWA