When the handset is lifted, the switch hooks close and DC can flow through the telephone. In the case of an incoming call this will be detected at the exchange and stop the ringing. If the customer is starting to make an outgoing call, the "loop" placed across the telephone pair will operate a line relay in the exchange and eventually cause the connection of dialling tone to the line.
The current through the telephone largely passes through the microphone, or "transmitter" as it was called during the first half of the last century. The microphone is of the carbon type, ie a diaphragm rests against a set of carbon granules, the resistance of which varies when the diaphragm vibrates to speech. The resistance of a "good" microphone will be somewhere close to 200 ohms.