Google’s Chief Economist, Hal Varian, explains in this 10-minute video the basics of search advertising with Google’s Adwords program. Some of the key concepts covered include bidding against competitors, click-through-rate, or CTR, the ever-elusive quality score of an ad and how that all affects an ad’s "Ad Rank."
What many people don’t know is that you can outrank someone who bids more on a key phrase than you if you have a better quality score. Quality score is determined by how closely your key phrase, ad copy and website’s landing page relate to one another. Google wants people to get relevant results when clicking on advertisements, so this is how they achieve that.
The video is very basic, but it is a wonderful illustration of how a very complex system works.