It starts whats called "The Loop".
The loop is basically just a while...loop Wordpress uses to iterate through a list of pages/categories/posts/etc. It either looks for "loop-page.php" or "loop.php" if it doesn't exist...if it looked like:
It would look for a file called "foo-bar.php" and if it failed then "foo.php".
It's used to either show a blogroll, create a list of categories, etc. In your case, it would probably go through each page and check whether it should show the_content or the_excerpt.