AdSense is an ad serving program run by Google. It is "pay per click" "contextual" advertising, which basically means it is advertising that is in context with its environment (your blog).
Basically, you simply add a piece of code to your blog that helps Google analyze what your page is about so they can serve ads on that topic. This increases the chances of your readers clicking the ad which increases the chances that you’ll earn something from them.
AdSense also provide a variety of other income streams to bloggers including a site search tool (you make money by people searching your site) and referral tools (where you can make money by recommending Google products).
Some sites do very well with Adsense and end up making a lot of money. And yet, many sites do very poorly with the program. The biggest mistake people make with Adsense is they simply slap it in their websites and hope that it will automatically earn them big money. It isn’t necessarily that easy.
Your income will depend on a number of factors:
- the topic of your site (if you have high paying keywords you stand to earn more)
- responsiveness of users to ad (are visitors coming to your site with blinders in their eye or do they look at the ads as additional complementary resource)
- traffic (you earn more with more traffic, even if you have low paying keywords or other metrics)
- how you implement the ads on your site (some positions and colors work better than others)