Last month, Google launched Bid Simulator in AdWords. The idea behind the simulator is to calculate whether or not spending more or less would be more cost-effective.
Let's say you're paying $0.50 per click. The Bid Simulator can show how much more you would have to pay to get more clicks. It could be $1.00 per click to get 10 more clicks, but that might not be worth it to you if it lowers your overall revenues. This, however, generated some confusion as they thought that the Bid Simulator was actually a Bid Recommender, and that Google was trying to get people to bid higher for keywords.
Of course, we never saw comments complaining about Bid Simulator suggesting a lower CPC would produce a higher revenue.
Now, Google's Chief Economist Hal Varian has taken to the Google blogs and YouTube to spell out Bid Simulator for you in a new Tutorial. The overall idea is to know your value per click instead of just your cost per click. Check the tutorial out in all of its economic glory and then give your opinion of the vid below.