Most people understand the auction concept that underlies Google AdWords. It's a little more complex than a simple auction, the Quality Score of your keyword determines the ad rank and that either boosts the real value of your dollar bid, or reduces it.
But it's an auction nonetheless.
What many people fail to realise is that before your keyword is even entered into the auction another selection process has already taken place.
Since, for most advertisers, there are any number of keywords within their account that could match a particular search query, Google will decide which has the higher ad rank and, therefore, is the one which should become your account's Champion in the battle for results page dominance.