How does the google adword bidding actually work

How does the google adword bidding actually work?
if I am keeping automatic bidding with maximum cap $1, and my competitor keeps $2.
with the same keyword, similar ads and samilar website, will google pick my competitors in the top list?

and how much will he be charged per click? $1 or $2???

Where you appear in the list depends on how much you are willing to pay. Whatever price someone bids for is what they pay when someone clicks on the link.

If a keyword becomes to expensive to pay for, then you either have to choose another one or use a phrase instead.

No one can explain the whole thing you here. Read official Adwords guide by Google to clearly understand the whole concept.