Act 1- it is the introduction of characters and setting, possibly a glance at the villain and an introduction to the threat within the story.
This is where all the reader needs to become familiar with the character and become invested in the story that is unfolding. The world needs to be established
End of Act 1 happens when the character reaches the point of no return. He or she is propelled or pushed forward into the story and the character’s path is set
Example: Dorthy is introduced into the story. We see that she is a young girl who is spoiled and untested. A tornado whisks her away to the strange land of Oz.
Act 2- this middle act usually takes up about 50 percent of the story as the character is further developed and the stakes become clear.
This is where relationship building happens between the main character and the supporting characters, and it’s were subplots usually take place (for novels or longer short stories).
End of Act 2 happens when the character realizes what must be done to resolve the problem that he or she has been faced with.
Example: Once in Oz, Dorthy meets Glinda. She tells Dorthy what must be done to go home and Dorthy sets out on her mission to find the Wizard of Oz.
Act 3- is when the character finds the resolution to the problem.
This is where the character rises above everything in his or her path to be the story’s champion.
End of Act 3 happens once the character resolves the main issue of the story either for the good or bad.
Example: Dorthy defeats the wicked witch and finds the Wizard of Oz.
Now it's true that the 3 act applies mostly to screen plays, but it can also be applied to most stories as well. Sometimes the acts are expanded to create more than three, and sometimes the first act is combined with the second act in stories, but using the three acts can help to show the skeleton of a story. It's a good simple way to make sure a story is on the right track to creating a coherent and dynamic piece of work. If you haven't already, can you break down your current piece of work and find the 3 acts of it's structure?
There are also those who argue that a 3 act structure can't show all the elements of a story that it really takes a 5 act structure. This type of structure just breaks down the story even further with exposition, rising action, climax, falling action and the denoucement or resolution. You can read more about in a post that I wrote a while ago about Freytag's 5 act structure.