One Christmas Eve, during a stop at an orphanage, a baby boy named William, captivated by the sight of a teddy bear, crawls into Santa Claus's (Ed Asner) sack of gifts while he is delivering toys. Santa Claus unknowingly takes the boy back to the North Pole, and when discovered, is renamed Buddy because one the elves notices he is wearing "Little Buddy" brand diapers. Papa Elf (Bob Newhart) volunteers to raise him.
Buddy (Will Ferrell) grows up at the North Pole and is unaware of his humanity. Papa Elf makes him his apprentice and explains that he repairs the "Kringle 3000, 500 Reindeer-Power" jet engine on Santa's sleigh, which he invented in the 1960's when the Christmas spirit that powers the sleigh started declining after people started to stop believing in Santa Claus, forcing him to build the engine to assist Santa. Due to his being a human in an environment designed for the North Pole elves, Buddy is uncomfortably bigger than the elves, and is unable to use the items utilized by them. His toy making skills are comparatively inferior and he is unable to keep up with the elves' high quotas, and despite the elves' assurances that he's just "special", is demoted to a demeaning job testing toys. While working, he overhears another elf saying that Buddy is human. Papa Elf reveals that Buddy was born to Walter Hobbs (James Caan) and Susan Wells and given up for adoption, and that Walter never knew of his existence. He explains how Susan later died and that Walter now works at a children's book company in New York City. Buddy is convinced by Leon the Snowman (Leon Redbone) to go to New York to find his father. Prior to leaving, Santa informs him that his father, Walter, is on the naughty list due to his greed and insensitivity.
Upon arriving in New York City, Buddy displays his ignorance in several ways, as he crosses the street at the wrong time, chews discarded gum on the subway station's handrails (ignoring Santa's earlier advice not to do so), and takes a coffee shop's claim to have the "world's best cup of coffee" literally. Eventually, he finds his father in his office in the Empire State Building. Walter initially lets him in, thinking Buddy is sending him a Christmas gram but when Buddy tells him about Susan Wells, an incredulous Walter has security throw him out, who advise Buddy that he go to Gimbels, where the manager (Faizon Love), mistakes him for a Santa Land elf. Here, he meets a woman named Jovie (Zooey Deschanel), a Gimbels employee whom he falls in love with. Upon learning that Santa will be arriving the next day, Buddy sneaks in and spends the night giving Santa Land a makeover, complete with Lego models, fancy decorations, and a giant glitter sign. He also purchases a nightie to give to his dad because it's "for that special someone", but when he tries to deliver it, security take it and again throw him out.
When the store Santa (Artie Lange) arrives to meet the kids, Buddy is horrified to discover that he is not the real Santa, and the two have a destructive brawl after Buddy rips off the man's fake beard to expose him as an imposter. As a result, he is jailed and banned from the store. After opening Buddy's gift, Walter gets a call from the police and, after reluctantly bailing Buddy out, takes him to a pediatrician (Jon Favreau) for a DNA test, which confirms that Buddy is Walter's biological son. Although Walter is still incredulous seeing Buddy as insane, he is pressured by the doctor into taking him home to meet his stepmother, Emily (Mary Steenburgen) and 12-year-old half-brother Michael (Daniel Tay). Walter and Michael are put off by Buddy's childlike behaviour (such as slathering his spaghetti in maple syrup and M&Ms and not seeming to understand that neither of them are interested in playing with him), but Emily insists that they take care of him until he "recovers".
Buddy eventually befriends Michael after single-handedly helping him defeat a gang of bullies in a snowball fight, and Michael encourages Buddy to ask Jovie out. Meanwhile, Walter learns from his boss Fulton Greenway (Michael Lerner) that his company is failing after publishing the flop "The Puppy and the Pigeon" with two missing pages, believing the price to re-print the book is too high. The next day, after some pressure from Emily, Walter reluctantly takes Buddy to work with him and sends him down to the mailroom so he cannot be disturbed. However, he accidentally becomes drunk after mistaking a co-worker's whisky for syrup and throws an outrageous party, which disrupts a phone conversation with Walter and best-selling children's book writer Miles Finch (Peter Dinklage), whom Walter has hired in order to save his company. Later at night, Buddy goes on a date with Jovie and manages to win her over with his child-like personality. The next day, the vertically challenged Finch arrives at Walter's company and begins to share some of his suggestions for book covers, but Buddy walks into the conference room to tell his dad about his newfound love and mistakes Finch for an elf. After becoming offended by Buddy's questions about how he left the North Pole and if Santa knows that he is there, Finch loses his temper and attacks Buddy before storming out, despite Walter's pleas for him to stay. Enraged that the one chance of saving his company has been ruined, Walter tells Buddy that he does not care that he is an elf, that he is insane, or that he is his son before yelling at him to "get out of his life". Deeply saddened, Buddy returns home and, after writing a message on an etch-a-sketch to Walter apologizing for ruining his life and "cramming 11 cookies into the VCR", runs away.
Back at the office, Walter has given up hope on saving his company and now feels guilty for upsetting Buddy, when his associates tell him that they found a notebook Finch left behind in the conference room. Discovering that it is filled with excellent ideas for children's books, Walter excitedly tells them to get a storyboard ready. At the house, Michael finds Buddy's note, and bursts in on Walter's meeting with Greenway to frantically tell him that he is gone. After being convinced by Michael that he has been putting his job over his family, Walter asks Greenway to reschedule, but when he callously refuses, Walter and Michael tell him "up yours" before leaving. As a result, Greenway fires Walter. Meanwhile, while walking through the streets, Buddy sees Santa's sleigh crash in Central Park, which attracts the attention of various news stations, the NYPD, and fellow New Yorkers. When Buddy finds Santa, he explains that the sleigh's engine had broken off, and that the last bit of Christmas spirit which powers the sleigh has faded as well. Walter apologizes to Buddy for his behavior and accepts him as his son. Buddy then takes them to meet Santa, who reveals to them that believing in him can make his sleigh fly. Getting an idea, Michael grabs Santa's list and reads it in front of the TV cameras set up outside the park so that people all over New York City can believe in him, while the Central Park Rangers chase Santa's sleigh as Buddy tries to reattach the engine.
Jovie, who was in the crowd after seeing the events on TV, manages to overcome her shyness and gets the sleigh back in the air by the power of Christmas spirit when she leads the crowd of people in singing "Santa Claus Is Coming to Town" on live TV, recalling Buddy's statement; "The best way to spread Christmas cheer is to sing loud for all to hear." However, Santa is still unable to fully power the sleigh. Walter, who was mouthing the words, is convinced by Michael to overcome his lack of Christmas spirit and starts singing for real. This allows the sleigh to fly higher and Christmas is saved. By the next Christmas, Walter starts his own publishing company with the first best-selling book released titled Elf, an account of Buddy's adventures written and illustrated by Buddy himself.
Sometime later, Buddy and Jovie have a daughter named Susie, named after Buddy's now-deceased biological mother. During the film's closure, the family visits Papa Elf at the North Pole.
- Will Ferrell as Buddy Hobbs
- James Caan as Walter Hobbs
- Zooey Deschanel as Jovie
- Mary Steenburgen as Emily Hobbs
- Daniel Tay as Michael Hobbs
- Ed Asner as Santa Claus
- Bob Newhart as Papa Elf
- Faizon Love as Gimbel's manager
- Peter Dinklage as Miles Finch
- Amy Sedaris as Deborah "Deb"
- Michael Lerner as Greenway
- Andy Richter as Morris
- Kyle Gass as Eugene Dupree
- Artie Lange as Gimbel's Santa
- Peter Billingsley as Ming Ming (uncredited)
- Leon Redbone (voice) as Leon the Snowman
- Ray Harryhausen (voice) as Polar Bear Cub
- Jon Favreau as Dr. Leonardo
- Mark Acheson as mailroom worker