It is raining in Covent Garden at 11:15 p.m. Clara complains that Freddy has not found a cab yet. Freddy returns to his mother and sister and explains that there are no cabs to be found. They chide him, and as he runs off to try again to find a cab, he knocks into Liza, a flower girl, spilling her flowers into the mud. Freddy's mother gives her sixpence when she complains that her flowers are ruined. Colonel Pickering comes onstage, and Liza tries to sell him a flower. He gives her three hapence. A bystander advises Liza to give Pickering a flower for it, because there is a man behind a pillar taking down every word that she says.
Liza becomes hysterical, claiming that she has done nothing wrong. She thinks that he is an informant for the police. The man, Higgins, shows Liza what he has written--which is not a record of possible misdeeds. When she complains that she cannot read it, he reads it out to her, reproducing what she has said in her exact accent.
Higgins amuses the small crowd that has gathered when he listens to what they say and guesses their hometowns with exactitude. Higgins whistles for a taxi for Clara and her mother, and they exit.
Liza picks her flowers out of the mud while Higgins explains to Pickering that he is able to guess where people are from because he studies phonetics. To make money, he gives lessons to millionaires to improve their English, which allows them to be accepted in higher social milieus. When Higgins finds out that Pickering has been in India and is the writer of [I]Spoken Sanskrit], he exclaims that he was planning to travel to India to meet the man. Pickering is equally excited when he realizes that he has happened upon the creator of "Higgins's Universal Alphabet"--for he has traveled from India to meet Higgins.
They arrange to have dinner together. Liza makes a last-ditch effort to sell Pickering some flowers, claiming that she is short for her rent. Having recorded what she was saying, Higgins points out that she cannot be short for her rent because she said she had change for half a crown. (His record traps her in her own words after all.) Liza flings her basket at him in desperation. Higgins hears a church bell tolling and generously fills her basket with money anyway, before leaving with Pickering.
Freddy arrives in a cab, looking for his mother and sister. He does not know what to do with the cab when he realizes that they have left already, but Liza wants to take the cab home. The cabman looks doubtful at her ragged appearance, but she shows him her money before she gets in.
Besides introducing the major characters of the play, this act introduces socioeconomic class as a central theme of Pygmalion. As a socialist, Shaw was particularly concerned with exploring and exposing the power divide between the poor and the rich. By setting the play in London, Shaw chooses to deal with a society that is particularly stratified. British class-consciousness is based not only on economic power, as it is in many other societies, but also on history (historic class differences). The play highlights British people's recognition of accents to differentiate among themselves not only geographically (a Welsh accent is distinct from a Scottish accent, which is distinct from a Surrey accent), but also to distinguish (on another but related dimension of accents) the various social classes.
Higgins's ability to pinpoint the location of origin of members of the crowd means not only that he can tell what part of England, or even what neighborhood of London, they are from, but also that he can probably guess fairly easily their socioeconomic status. In the early twentieth century, social mobility in Britain was slim to none, so the fact that Pickering's accent is audibly a Cambridge one (tying him to a very upper-class university) means that he is upper-class and likely to remain so. Conversely, Liza was born into Lisson Grove and, correspondingly, grew up speaking with what was considered a terrible accent. She is thus likely to remain poor not only because her family was poor, but also because everyone else can tell that she had a poor upbringing from the way that she speaks.
Nevertheless, Higgins's system of teaching better English serves to undermine the system in which his keen awareness of language so easily has allowed him to participate. Higgins, like Shaw, sees the strict hierarchy of British society as mutable after all. Higgins's alphabet is a new type of shorthand which more accurately conveys the exact sound of the speaker's voice. So, while normal shorthand conveys the content of a conversation, Higgins's form also records the intonation and accent of a speaker's voice. Even the name of his system of shorthand writing, "Higgins's Universal Alphabet," not only indicates that it reproduces all the sounds of language, but also implies that he believes that everyone should have access to elevated language.