It stars Will Ferrell as the film's central character "Buddy", and Artie Lange as Santa. As an infant in a New York orphanage, Buddy had crawled into Santa's bag on Christmas Eve, and Saint Nick unwittingly brought him back to the North Pole. Not knowing to whom the child belonged, the elves decided that he would be raised by them and that it would never be disclosed to him that he was really a human. However, when Buddy overhears the other elves talking about the fact that he is human, he goes to his adoptive father for advice.
Buddy's adoptive father acknowledges that Buddy is, indeed, a human, and tells him the entire story of how he came to be raised by elves. Most important, he tells Buddy about his human father, Walter Hobbs, who lives in New York. Buddy soon decides to head off on a quest to find his father, which leads to all kinds of humorous trouble.
As Buddy (Will Ferrell) grows, his height and poor toymaking skills raise awkward questions that his adoptive father continually waves away. Papa Elf also shows Buddy the jet engine he created in the 1960s to assist Santa's sleigh, which had run on the power of the Christmas spirit, until people began to doubt Santa's existence. After a string of accidents in which Buddy's non-elfness becomes obvious, Papa Elf finally breaks the news that he was adopted: his birth parents fell in love with each other when they were high school students in the 1970s, and nine months later, Buddy was born, in 1973. His late mother, Susan Wells, placed him for adoption at the orphanage. Buddy's now 46-year-old father, Walter Hobbs (James Caan), was never aware of Buddy's existence, and has since become a children's book publishing executive with offices in the Empire State Building; Walter is presently married to Emily (Mary Steenburgen), and has a 10-year-old son, Michael (Daniel Tay).
Buddy is overwhelmed by the news, and with information from Papa Elf and encouragement from a snowman (Leon Redbone), he sets off to New York to find his biological father. Upon arriving, he is puzzled with the culture of the city, but eventually finds his way to Walter's office, only to be thrown out as Walter has no idea who Buddy is and is otherwise pressured with getting a new book published before the end of the year. Buddy finds a department store called Gimbels and comes across their Christmas display "The North Pole", and is subsequently mistaken as an employee by the department manager (Faizon Love). Buddy also meets fellow employee Jovie (Zooey Deschanel) and befriends her. When the manager says that Santa is coming, Buddy assumes that the real Santa is coming and becomes very excited. After Gimbels closes for the night, Buddy secretly stays to decorate "The North Pole" for Santa's arrival. When the employees return, they are amazed at Buddy's work, and the manager fears someone is plotting to steal his job. When the store Santa arrives, Buddy spots him as a fake and gets into a fight around "The North Pole", destroying much of the decoration. He is fired and then arrested.
Walter retrieves Buddy from jail, after getting a card from him that includes a picture of Walter and Susan, and learns through a paternity test that Buddy is indeed Walter's son. Walter allows Buddy to move into his apartment, hoping to get him to adjust to a normal life so that he can then move out on his own. Buddy quickly becomes friends with Michael, and Michael suggests that Buddy should go on a date with Jovie. Buddy takes the suggestion, and he and Jovie see several sites around New York, and share a kiss while ice skating at Rockefeller Center. Buddy excitedly tries to tell Walter of his date, but barges in on a Christmas Eve meeting between Walter and a famous children's author and a midget, Miles Finch (Peter Dinklage) as a last attempt to get a book before Christmas; Buddy mistakes Miles as a fellow elf, and causes Miles to walk out on Walter. Walter tells Buddy to get out of his life forever, causing Buddy to run away. Michael returns home to finds Buddy's final message, and runs to tell his dad what happened. Walter realizes what he has done, and promptly leaves in the middle of an important meeting with his boss to go find Buddy, resulting in his firing from the publishing company.
Buddy, wandering through Central Park, comes across Santa's grounded sleigh. and Santa explains that the engine broke off somewhere over the Park, and that without Christmas spirit, the sleigh will not fly. Walter and Michael, searching the park for Buddy, happen upon the engine, and they are shortly reunited with Buddy. Buddy works on repairing the sleigh's engine, while Walter and Michael, along with help from Jovie, attempt to distract the rangers who have come to get Santa, as well as encourage everyone around to believe in the Christmas spirit. Santa and Buddy manage to take off just before the rangers arrive, but while the engine still fails, the others' efforts, including Walter's new belief in Christmas, have given the sleigh enough Christmas spirit to continue on its way and saving Christmas.
After Christmas, Walter starts a new publishing company, with their first book, "Elf" written by Buddy Hobbs, becoming an award winning children's novel. Buddy and Jovie get married and have a daughter.