In 1907, young Alexander Ekdahl and his sister Fanny Ekdahl grow up in a prosperous Ekdahl family that runs a modest theatre in a Swedish town. During Christmas they stage a Nativity play and host a grand party. The parents, Oscar Ekdahl and Emilie Ekdahl, are happily married until Oscar dies suddenly of a stroke.
Not long after, Emilie marries the local bishop, Edvard Vergerus, a strict, controlling figure who moves into his home with his mother, sister, aunt, and maids.
Within the family, the womanizing uncle, Gustav Adolf Ekdahl, carries on with the nursemaid Maj (Maj), while the other uncle, Carl Ekdahl, laments his own failures.
Edvard's authoritarian shadow casts a cold, controlling pall over the children, and the bond between Alexander and his stepfather becomes especially fraught as Edvard punishes him harshly for his stories. Emilie asks for a divorce, which Edvard will not consent to; though she may depart, it would be desertion and the children would remain in his custody. During Emilie's absence, she secretly visits her former mother-in-law, Helena Ekdahl, revealing she is pregnant.
During Emilie's absence, Edvard confines the children to their bedroom. There, Alexander Ekdahl shares a tale of ghosts from the Vergérus family, claiming the bishop is responsible for their deaths. The maid Justina reports the story to Edvard, who responds with corporal punishment. After Emilie returns, Isak Jacobi helps smuggle the children away to live with him and his nephews, Aron Retzinsky and Ismael Retzinsky, at a store.
Emilie’s former brothers-in-law confront Edvard to negotiate a divorce, using the children, the bishop's debts, and the threat of a public scandal for leverage, but Edvard remains unmoved. Emilie, now in late pregnancy, refuses to restore the children and administers a large dose of bromide sedative to Edvard so she can flee while he sleeps. He threatens to follow her, but passes out. Later, Aunt Elsa accidentally catches fire from a gas lamp; both she and Edvard are badly burned, and Edvard dies shortly thereafter.
Alexander had fantasized about his stepfather's death while living with Isak and the Retzinsky nephews. The mysterious Ismael explains that fantasy can become true as he dreams it.
The Ekdahl family reunites for the christening of Emilie's and the late bishop's daughter, as well as the extra-marital daughter of Gustav Adolf and the maid Maj. Alexander encounters the bishop's ghost, who knocks him to the floor and tells him, > You can never escape me.
Emilie, having inherited the theatre, hands Helena Ekdahl a copy of August Strindberg's A Dream Play to read and suggests performing it together onstage. Initially scoffing at the idea and calling Strindberg a "misogynist," Helena takes to the idea and begins reading it to a sleeping Alexander.
