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Act structure explains how the plot of a film’s story is composed. Just like plays (staged drama) have acts, critics and screenwriters tend to divide films into acts, though films don't require to be physically broken down as such in reality.
Whereas plays are actual performances that need 'breaks' in the middle for change of set, costume, or for the artists' rest, films are recorded performances shown mechanically and therefore don't need actual breaks. Still they are divided into acts for reasons that are in aesthetic and structural conformation with the original idea of Act in theatre. Act breaks in a film are usually very obscure for lay audience, and only a trained person can detect the ending of one act and the beginning of another in the progression of a movie, although learned people can typically mark it by a 'plot point' in writing process or film appreciation. The idea of act structure is of more value in screenwriting (i.e. while writing a screenplay) than watching a film, though the act breaks are never actually written in the final copies of screenplays, unlike in play scripts, where they are clearly mentioned as such; e.g. Act 1 Scene 3, etc. However, in television scripts called teleplays, clear denotations about act breaks are almost always included, usually to coincide with commercial breaks.
Act is the broadest structural unit of enacted stories. The most common paradigm in theatre, and so in films, is that of the three-act structure proposed by Aristotle. Simply put, it means that any story has a 'beginning', a 'middle' and an 'end'. Playwrights and screenwriters divide their stories into three major parts, namely 'Set up', 'Confrontation' (alternatively called 'conflict' or 'complication') and 'Resolution'. These form the basic three acts of any performance – staged or screened.
Though various theories have been proposed and debated, the three-act structure stands as the most popular one. Also, this is what Hollywood has discovered and proved as the most successful in commercial movie making.
The 'three-act structure'
Native forms (including feature films) can often be seen in distinct parts called 'acts'.
It follows that the enacted story opens with the introduction of characters and situations, backdrop, locale etc. It creates interest in the audience and takes them to feel concerned as to what the real problem is and what may happen with it. Plays, and screenplays, usually revolve around main characters – the 'Protagonist' and the 'Antagonist' who engage themselves into a battle. That is "Set up".
The next part – and considered to be the most important – is complication of the problem of the story. It intrigues the audience all the more, giving them extra information and putting various points of view for imaginative comparison. This eventually leads to higher points of audience interest. Because this second act of most screenplays adds all the possible dramatic values to the plot, this is considered to be the core part of a script. The antagonist and the protagonist try and experiment with all their strengths (and weaknesses of the other) to win the battle. That is "Confrontation".
This takes us to the third act, the "Resolution". This means it tends to 'solve' the problem (-s) of the story developed so far. But this is not obvious, as it is expected to bring the 'climax' (or a series of climaxes) to give the audience the pay-off. The tool usually implemented is a 'do or die' situation where doors of escape for either or both of the two characters go on closing one by one, leaving them with only a thin chance that demands the fullest exploitation of their qualities and energies. This so-called jaw-dropping, breath-taking, arm-rest-grabbing 'obligatory moment' for the audience leads to the final outcome of the entire plot. And it is usually the triumph of the good (Protagonist) over the evil (Antagonist), with rare exceptions.
This framework can not be rigidly applied to all the film stories, and there are a good proportion of Hollywood movies that defy this theory. Many films follow this pattern only to a subtle extent, where their genre demands a more delicate handling. Screenwriters and script doctors have tried to provide alternative ideas, which again are open for debate. As alluded to previously, cinematic framework varies geographically and, through time, cinema has evolved unique approaches to storytelling. Also, this theory may not be fit for non-fiction films like documentary or corporate films, which may not have a 'plot' at their base with 'characters' and all their 'actions and speeches' predecided, like the feature films have. Such non-fiction films require their own forms of arrangement.
What is important here is that ideas of Act structure help us understand films better. More importantly, these are 'tools' of the screenplay writers who can break down the story at hand and play with various ways of presenting it to find the best possible one. Experts have gone long way ahead in dividing plot to even smaller structural units and they keep working to find the most effective formula of structuring a film story.