How do Google's AdWords and AdSense work?

Answered by HowStuffWorks

With AdWords, advertisers submit ads to Google containing lists of keywords that relate to the product or service. When someone searches Google using any one of those keywords, the ad is displayed on the search engine results page. Every time someone clicks on the ad, the advertiser pays Google.

AdSense is similar to AdWords, but instead of displaying ads on Google's result page, the ads are integrated into a third-party Web site, at the Web master's discretion. Google's spiders crawl and analyze the content of the site and Google picks ads with keywords relating to the individual's site. Whenever a Web surfer clicks on an ad on the individual's site, the webmaster gets part of the ad revenue and Google receives the remainder.

Source: http://curiosity.discovery.com/question/how-google-adwords-adsense-work