How does Ad Auction work on Google Ads (Google Adwords)?

Let's  see how Google Ad auction actually works: Google AdWords is application to Google search and display networks 
makes a profitable and efficient system to help businesses to control on the ad frequency and money they are making from it.

In Google's auction items goes in higher position on display network and search ads on basis of 'Keywords'.
But this is not  the only factor responsible for the ads to make the placements up.The other two factors are: 
Advertiser’s bid and  the projected quality of the ads.

Google determines your rank by using this formula:

AD Rank = Max CPC Bid x Quality Score

The auction system is set up so that advertisers only need to bid 1 cent higher than the advertiser below them. However, advertisers with a lower bid can rank higher than a higher bidder if they have an ad that has a higher quality score.
The more time you spend on optimizing your ad and your landing pages, the more money you’ll save!