I think the help center actually explains this best:
Actual cost-per-click (CPC)
Your actual cost-per-click (actual CPC) is the final amount you're charged for a click. You're often charged less -- sometimes much less -- than your maximum cost-per-click (max. CPC) bid, which is the most you'll typically be charged for a click.
Actual CPC is often less than max. CPC because with the AdWords auction, the most you'll pay is what's minimally required to hold your ad position and any ad formats shown with your ad, such as sitelinks.
How this works
We combine your Quality Score, the max. CPC bid, and the expected impact of extensions and other ad formats to determine Ad Rank. When estimating the expected impact of extensions and ad formats, we consider such factors as the relevance, clickthrough rates, and the prominence of the extensions or formats on the search results page. Each advertiser’s Ad Rank is then used to determine where the ad appears and what types of extensions and other ad formats will show with the ad (or whether the ad or ad format will appear at all).
For ads on the Search Network, the minimum Ad Rank required for ads above search results is generally greater than the minimum Ad Rank required for ads beside search results. As a result, the actual CPC when you appear above search results could be higher than the actual CPC if you appear beside search results, even if no other advertisers are immediately below you. Although you may pay more per click, top ads usually have higher clickthrough rates and may allow you to show certain ad extensions and other features available only in top ad positions. As always, you’re never charged more than your max. CPC. bid.
There's some great examples of this in action on the link above.
Finally, a little dated and doesn't take some new factors into account is the AdWords bidding tutorial by Hal Varian. Give it a watch. It's worth a few mins to understand this and he lays it out in VERY simple terms.
Let me know if you have any questions.