The Pathfinder panel (Window > Pathfinder) is used to combine objects into new shapes. It is used extensively to create complex shapes from simple shapes. Existing shapes can be combined together in various ways to create more detailed shapes. The top row of buttons in the panel are called Shape Modes and they control how the simple shapes interact with each other when being made into the new shape.
Unite: Outlines all selected objects as if they were a single, merged object.
Minus Front: Subtracts the front most objects from the backmost object.
Intersect: Traces the outline of the region overlapped by all the objects.
Exclude: Traces all nonoverlapping areas of the objects, and makes overlapping areas transparent.
Applying a Shape Mode Pathfinder effect using the Pathfinder panel