The economics can be pretty bad, a lot of people don't make much money but they also don't make quality games or read the market. There are success stories, Hero Interactive, Berzerk Studio, Nitrome, Armor Games, Long Animals etc.
You should check out http://www.flashgamelicense.com/ it's a site where developers sell the sponsorship rights for their games. The guys who run it are very helpful and there's a forum full of information and a chatroom where you can usually find me and a bunch of other people trolling away.
In a nutshell: Mochi and CPMStar offer ads to go in the games. Mochi's CPM is usually pretty awful (I've served 6m+ ads for a lousy grand), CPMStar generally pays more but is more exclusive, it's harder to get them in your game.
GamerSafe (run by the FGL guys) and Mochi both have virtual goods/transactions platforms to charge for stuff in your game, I haven't used either yet.
Sponsorship is usually going to be the major source of revenue. Kongregate, Armor, Addicting etc pay for the branding rights in your game (the splash screens etc). This can go high into the 5 digits if you're talented enough - there are guys pulling 6 digits a year off this stuff, a couple that might be inching close to 7, and a lot that make between $0 and bugger all.
Andy Moore who was the community manager for Fantastic Contraption and then went on to make games himself has an awesome writeup about his game Steambirds:
http://www.andymoore.ca/2010/03/steambirds-by-the-numbers/
Chris Gregorio (xdragonx10) who makes the Medieval Rampage games amongst others has a great breakdown of his earnings and strategy here: