For AdSense publishers that are curious about how Google decides what ads to show on your site and when, the official AdSense Blog has posted a pretty good overview of just how the whole thing works. It's a quick and easy read that sheds a little bit of light on what the system is thinking when putting ads in place on AdSense publisher's sites.

From the post:

While bid price (the price advertisers are willing to pay for each click per thousand impressions) is obviously an important factor, we also calculate advertiser Quality Score to make sure the best performing ads will always appear on your site. Quality Score takes into account factors such as an ad's relevancy and click-through rate (CTR) (i.e. how likely users are to click on a given ad) because a higher CTR sometimes outweighs the benefits of a higher bid price. This ensures that your site always displays the ads representing the highest revenue potential for you.