Can you explain how the Google auction works?

The auction process goes like this:

    When a user enters a search, AdWords pulls all the ads whose keywords match that particular search.
    From the ads, any that aren't eligible, such as ads that target a different country or have been disapproved, will be ignored.
    From the ads remaining, only those with a high enough Ad Rank will show results.

It's a crucial stage of your campaign, so make sure anyone involved with it knows the process and how to get the most out of it.

The highest ad rank gets the 1st ad position. Your actual CPC will be determined by the ad rank of the next highest ad below you divided by your Quality Score. The only exception of this rule is when you are the only bidder or the lowest bid in the AdWords auction; then you pay your maximum bid per click!