How do people earn money from YouTube?

1. Ad revenue. When there's an ad on a video watch page, the creator of that video shares the revenue from that ad with YouTube. YouTubers aren't allowed to discuss ad rates, but it's generally acknowledged to be between $1 per 1,000 views, up to a few dollars per 1,000 views. Many YouTubers also make sponsored or branded content, in which they share or discuss a product for a fee. This can be very lucrative, but there's also the risk of clouding your authentic relationship with your audience.

2. Merchandising. Many YouTube creators sell shirts or mugs featuring logos or inside jokes. There are companies designed for niche creators looking to make merch for their audiences (I co-own one, Don't Forget To Be Awesome). For some YouTubers, this can be a bigger source of income than ads (it is for my brother and me), but for most it's a relatively small business.

3. Ancillary products. Many YouTubers are able to use their existing audiences as activation energy for other projects--from tours to music to makeup lines to books. Because many of these projects have better established business models (like, people generally expect to pay for books), this can also be a great business. It's unlikely my novel The Fault in Our Stars would've been so successful without the activation energy provided by the viewers of our videos.

4. Subscription fees. This is an emerging business model, but I think a very promising one. Voluntary subscription platforms like Patreon: Support the creators you love allow viewers to support the creators they love directly. This decreases the influence of advertisers and makes creators directly answerable to their audiences. It does, however, require that a percentage of viewers choose to pay.

I suspect most YouTubers make most of their money from ads, but I think advertising is probably shrinking percentage-wise as a revenue source, which I think is mostly good news. I think advertising is an important part of funding our online experiences, but ultimately I'd argue the Internet is healthiest when serving the needs of its human users rather than the needs of its corporate sponsors.

YouTube channels can generate revenue in several ways - professional youtubers use a combination (if not all) of these strategies:

• Advertisement with Google AdSense: the most popular and easier way to start monetizing a channel. Google will make 'ads' apear on your video: before, at the bottom, at the side, on cards... (you decide which formats you allow on each video). When viewers actually watch those pre-rolls or click on the batters, the advertiser will be charged, YouTube keeps 45% of the money and the owner of the channel gets 55%. Not all views are monetized and prices for thousand views fluctuate a lot throughout the year. For every 1000 views, an average youtuber can expect to earn between U$ 1 to 2, through AdSense. Many youtubers went public saying that if they depended exclusively of advertising, they couldn't make a living out of their channels.
• Sponsorship, endorsement, product placement: At some point of the video, you have something like "This episode is brought to you by YYY - the easiest way to ZZZ". This is a deal the youtuber made directly with some brand/company, the amount is rarely openly disclosed and it is usually a much better deal - the more subscribers, higher the value. Notice that when a video is financially sponsored, as a policy you should mark it on the details of the video: paid product placements and endorsements (Ad Policies).
• Affiliate links: Beauty channels, Unboxing and Review channels very often demonstrate a product, show its features, teach how to use it, etc... and in the description they include a link to where viewers can buy the product. Those links are created in a way that the store can identify the origin and the youtuber can earn a percentage of every purchase originated from that link. Is it allowed on YouTube policies? This is a gray zone. Another great video from Tim Schmoyer on the topic:
• Other deals: "can you wear our hat?" "how much for you to drink TTT at the beginning of your video?" Sometimes it is obvious, sometimes it is very discrete. Sometimes a youtuber does it to promote the business of a friend. If there is money, that "checkbox" about product placement should be marked - but I doubt every YouTuber inform every tiny deal.
In the end, many of them become famous YouTube Personalities, and they start exploring lots of different businesses that exist outside of YouTube, here are just a few examples:
• Create their own brand of products, sold online or in actual stores. 
• Don't forget subscribe me.
• YOUTUBE VIDEO.