In 1907, the young boy Alexander, his sister Fanny and their well-to-do family, the Ekdahls, live in a Swedish town and run a moderately profitable theatre. At Christmastime, the Ekdahls hold a Nativity play and later a large Christmas party. The siblings’ parents, Emilie and Oscar, are happily married until Oscar suddenly dies from a stroke. Shortly thereafter, Emilie marries Edvard Vergérus, the local bishop and a widower, and moves into his home where he lives with his mother, sister, aunt and maids.
Emilie initially expects that she will be able to carry over the free, joyful qualities of her previous home into the marriage, but realises that Edvard’s harsh authoritarian policies are unshakable. The relationship between the bishop and Alexander is especially cold, as Alexander invents stories, for which Edvard punishes him severely. As a result, Emilie asks for a divorce, which Edvard will not consent to; though she may leave the marriage, this would be legally considered desertion, placing the children in his custody. Meanwhile, the rest of the Ekdahl family has begun to worry about their condition, and Emilie secretly visits her former mother-in-law, Helena, revealing she is pregnant.
During Emilie’s absence, Edvard confines the children to their bedroom, ostensibly for their safety. There, Alexander shares a story, claiming he was visited by the ghosts of the Vergérus family, who revealed the bishop was responsible for their deaths. The maid Justina reports the story to Edvard, who responds with corporal punishment. After Emilie returns, the Ekdahl family friend Isak Jacobi helps smuggle the children from the house. They live temporarily with Isak and his nephews in their store.
Emilie’s former brothers-in-law confront Vergérus to negotiate a divorce, using the children, the bishop’s debts, and the threat of a public scandal for leverage, but Vergérus is unmoved.
Emilie, now in the later stages of her pregnancy, refuses to restore the children to Edvard’s home. Emilie allows Edvard to drink a large dosage of her bromide sedative. She explains to him, as the medication takes effect, that she intends to flee the home as he sleeps. He threatens to follow her family and ruin their lives, but blacks out. After Emilie gets away, Edvard’s dying Aunt Elsa knocks over a gas lamp, setting her bedclothes, nightgown and hair on fire. She runs through the house in flames to seek Edvard’s help, igniting him. Despite the sedative, he is able to get her off him, but dies shortly thereafter.
Alexander had fantasised about his stepfather’s death while living with Isak and his nephews Aron and Ismael Retzinsky. The mysterious Ismael explains that fantasy can become true as he dreams it.
The Ekdahl family reunites for the christening celebration of Emilie’s and the late bishop’s daughter as well as the extra-marital daughter of Alexander’s uncle, Gustav Adolf, and the family maid, Maj. Alexander encounters the ghost of the bishop who knocks him to the floor, and tells him that he will never be free. Emilie, having inherited the theatre, hands Helena a copy of August Strindberg’s play A Dream Play to read, and tells her that they should perform it together onstage. Initially scoffing at the idea and declaring Strindberg a “misogynist,” Helena takes to the idea and begins reading it to a sleeping Alexander.