In Act I, the characters are introduced and the setting is presented. We see the lead character, also known as the protagonist or hero, in their normal existence. Relationships between the lead character, supporting characters and setting are established in the first act. A bit of background on the characters is also included to show the audience how they got to where they are when the story begins.
The second act begins when the protagonist is confronted with an obstacle that he must conquer. This is often referred to as the initial conflict, turning point or first plot point, where an event occurs that changes the protagonist's world forever. Through the second act they work toward a goal that was established in the first act, constantly combating the conflicts that arise between the protagonist and the "bad guy," otherwise known as the antagonist or foil (which can be a person, group, place, thing, or state of mind). The audience has to wonder how the protagonist is going to overcome these obstacles to achieve his goal.
The riveting, edge-of-your-seat conflict and confrontation that propels the rising action of the second act brings the action to the climax of the story in Act III. The protagonist achieves his goal after facing an ultimate test of wills. Following the climax you'll find the winding down of action, and resolution of the conflict, that made the tale worth telling. The protagonist's return to equilibrium is also a key element of the third act.
The second act of a play takes up about 50 percent of the story, with the remaining half being divided almost equally between the first and third acts. Also, the term "denouement" is commonly used in reference to the resolution of a comedy, and in tragedies the end is frequently referred to as a "catastrophe."
Many theories abound on whether the climax of the story should come during the second act or the third. French director Yves Lavandier steadfastly believes in having the climax at the end of the second act instead of during the third, though this makes for a very short Act III. Screenwriting expert Syd Field has helped to proliferate the faith in the three-act structure, and believes the story's climax belongs in the third act.