What is AdSense?
Internet Marketing Dictionary | Google AdSense

For example, consider a web page about telescopes. Google's search technology already lets Google work out what a web page is about - this is what a search engines does. So if an advertiser is interested in getting their AdWords ads displayed when someone types "telescopes" into Google, why not combine technologies to deliver ads about telescopes on web pages about telescopes?

AdSense does this automatically and when someone clicks on an AdSense ad, Google charges the advertiser for the click and shares this revenue with the website owner. As it happens the first ever AdSense ad for on a web page about unicycles!

The amount the web site owner gets paid per click depends on how much the advertiser is willing to pay for the traffic which in turn will depend on how capable the owner is at turning his web traffic into profits. It will also depend on how much other people are prepared to pay to advertise in the same place because the AdWords system is really one enormous advertising market place where people compete to buy and sell advertising space with prices literally varying from one minute to the next.

One sophisticated AdSense technique is called AdSense Arbitrage.