Why circles go to circles
The cleanest argument is to break f into the three pieces above and
note each one preserves the class of circlines.
Step 1 — divide out (the case c \ne 0). Polynomial
division on \dfrac{az + b}{cz + d} peels off a constant:
\frac{az + b}{cz + d} = \frac{a}{c} + \frac{b - \frac{ad}{c}}{cz + d} = \frac{a}{c} - \frac{ad - bc}{c\,(cz + d)}.
Step 2 — read off the chain of simple maps. Building
z up to that expression uses only the three primitives, in order:
z \;\xrightarrow{\ \times c,\ +d\ }\; cz + d \;\xrightarrow{\ 1/(\cdot)\ }\; \frac{1}{cz + d} \;\xrightarrow{\ \times(-\frac{ad-bc}{c}),\ +\frac{a}{c}\ }\; f(z).
Step 3 — each primitive preserves circlines. Translations and
scaling–rotations obviously send circles to circles and lines to lines. The one substantive
fact is that inversion z \mapsto 1/z maps circlines to
circlines (a line not through the origin becomes a circle through the origin, and so
on). Composing maps that all preserve circlines gives a map that preserves circlines —
done.
The model example: half-plane to disk
The single most useful Möbius map in analysis is
f(z) = \frac{z - i}{z + i}.
It sends the upper half-plane
\{\operatorname{Im} z > 0\} bijectively onto the open unit
disk \{|w| < 1\}, carrying the boundary real axis onto the
boundary unit circle. Track three boundary points and the circline rule does the rest.
Step 1 — the point 0.
f(0) = \frac{0 - i}{0 + i} = \frac{-i}{i} = -1.
Step 2 — the point 1.
f(1) = \frac{1 - i}{1 + i} = \frac{(1 - i)^2}{(1 + i)(1 - i)} = \frac{-2i}{2} = -i.
Step 3 — the point \infty. With
a = b = 1, c = 1,
d = i,
f(\infty) = \frac{a}{c} = \frac{1}{1} = 1.
Three points of the real axis — 0, 1, \infty — land on
-1, -i, 1, three points of the unit circle. Since a circline is
pinned down by three points, the whole real axis must map to the whole unit circle, and the
half-plane on one side to the disk on the inside.
The leap to the Riemann sphere is what makes Möbius maps so tidy. On the ordinary plane the
point z = -d/c looks like a catastrophe — the denominator
vanishes. Add the single point \infty and the catastrophe becomes
a smooth bijection: -d/c simply goes to
\infty, and \infty goes to
a/c. Lines and circles stop being different species — both are
just circles on the sphere, one of them passing through the north pole. The algebra of these
maps is the algebra of invertible 2 \times 2 matrices
\begin{pmatrix} a & b \\ c & d \end{pmatrix}, which is why
composing two Möbius maps is the same as multiplying their matrices.