What Is AdSense for Content?
The first time the AdSense code runs on a page, Google sends a crawler (not the Googlebot crawler you might already be familiar with, but a different crawler not associated with the main Google search index) to fetch the page for analysis. Google then analyzes the content of the pages and tries to determine the keywords that are most closely related to or associated with the content. As part of this analysis, Google considers a number of factors, such as keyword density and the placement of keywords within certain tags. Google also considers its previous analysis of other pages on the same site or pages that link to the new page. (Most of the details of how AdSense works are covered in fair detail in the AdSense patent application.)
Within a few minutes (it takes between 1 and 15 minutes for Google to send its crawler after the AdSense code is placed on a new page and activated at least once), Google has compiled a list of keywords and phrases related to the page content. These are then used to search the AdWords ad pool. Only relevant ads from the ad pool are displayed on the site. Visitors are therefore more likely to click on such advertisements because presumably they're already interested in the page's topic.
Note that the ads displayed by AdSense for content can be text or image ads. Initially, Google restricted itself to serving text-only ads, but those restrictions were later dropped. AdSense publishers can choose on a page-by-page basis what kind of advertisements to serve, what format they should be (Google offers a number of different types and sizes of advertisements), and where they should be placed on the page.