Eccentric, 243-year-old Mr. Edward Magorium (Dustin Hoffman) owns and manages a magical toyshop. The shop has many quirks, including animated toys, a ledger that can bring to the purchase counter any toy on command, and a doorknob that, when rotated, changes the interior of a magic room. This room variously contains Mr. Magorium's apartment, a room full of constantly bouncing balls of various sizes, and other divisions of the toyshop. All of the toys are magical in one way or another; their magic and behavior, however, appear to depend on those of the store, which is itself intelligent and changes its appearance and actions according to its emotions. Magorium's assistant is the young woman Molly Mahoney (Natalie Portman). She is an aspiring pianist, has plans to quit the store and start a career in music composition (the story begins with her practicing her song and going to work), and is, unexplainedly, always addressed by her surname. Mahoney is Eric's only human friend, as shown by their first on-screen conversation, and is cherished in a paternal fashion by Mr. Magorium himself. Mr. Magorium's biographer and tenant is a strongman-like figure called Bellini, who lives in the shop's basement, runs errands for his employer, and sleeps with a doll. This doll, in addition to Bellini's task as Mr. Magorium's biographer, suggest the "soft" aspects of his personality that underlie his forbidding demeanor.
Unexpectedly, Mr. Magorium announces that although he is not ill, he intends to "leave" — that is, to die — and gives the shop to Mahoney in his will. Prior to this, he has given her an undecorated cube made of wood and the task of finding a use for it. This cube becomes instrumental in Mahoney's coming of age.
As a preparation for his "departure", Magorium hires accountant Henry Weston (Jason Bateman), giving him an interview wherein the latter demonstrates knowledge of Fibonacci numbers. Henry, nicknamed the "Mutant" as a play on his job's title of "accountant" (playfully misinterpreted as a portmanteau of "a counter" and "mutant"), wins Mr. Magorium's approval when he demonstrates this knowledge on command and states as a reply to a question "anything can happen". His task is to organize the shop's long-neglected paperwork, which contains numerous financial difficulties whose effects have evidently never harmed Mr. Magorium or his business in addition to records of transactions with historical figures such as Thomas Alva Edison. Weston is not popular with the children who continuously visit and play in the shop; later, when Eric tries to become friends with him, Henry declines to play checkers on grounds that he "never [stops] working". Mahoney already has a low opinion of Weston, because he is skeptical of the shop's magic.
In response to its founder's decision to die, the shop sulks and on the following day throws a tantrum wherein its walls turn grey, the toys and books sold in it begin behaving erratically, and the ledger produces a Ring-Tailed Lemur when Mahoney requests from it a lollipop. The erratic behavior of the toys and books frightens the customers out of the shop. Mr. Magorium then calls a meeting of himself, Mahoney, Henry, Eric, and some of the toys to explain the situation at hand. Worried by Mr. Magorium's plan to "leave", Mahoney rushes him to the hospital, where doctors decide that Mr. Magorium should be kept when he has explained his age and occupation. Here, Mahoney uses the doctors' skepticism of magic to convince them that Mr. Magorium is suffering from delusions as a result of imminent death. He remains in the hospital overnight, surrounded by a backdrop of stars organized by Eric, and is released on the next day on grounds that nothing is physically wrong with him.
Meanwhile, Eric befriends the Mutant and introduces him to an extensive collection of diverse hats kept by Eric himself. The two play with these hats until interrupted by Eric's discomforted mother, who had not expected Eric to befriend anyone of Henry's age.
Mahoney attempts to prevent Mr. Magorium's departure by showing him life's joys, but he does not decide against "leaving". After a heartfelt, affectionate conversation, Mahoney leaves in tears, whereinafter Mr. Magorium throws his will in the form of a paper airplane, peacefully dying as the airplane flies around the room, temporarily changing the surroundings to match the image of a star field. Many children and adults crowd the cemetery to witness his funeral, which is held on the next day. Strangely, his first name, Edward, does not appear on the headstone of his grave. The store reacts to Mr. Magorium's death by darkening itself and refusing to show any magic.
Mahoney, believing herself to be unworthy of the store, offers it for sale. Eric, desiring to see the Emporium continue as it has, approaches Weston with a "business proposal" wherein Eric is willing to invest his savings and pocket-money in the shop. Though he refuses, Weston agrees to persuade Mahoney against selling the store when a woman looked at the property and rejected it. Her son saw a toy and played with it (Mahoney thinks it's not magic, she says it's a magnet). The toy's magic is revived because of that. Henry is caused to believe in the store's magic when Mahoney, by talking passionately of her faith in it, causes the wooden cube she was given to move as if alive. Influenced by further urging, the cube moves with increasing speed and confidence, eventually flying around the shop and halting in front of Henry, who faints from sheer astonishment.
When he wakes, the cube has vanished, and Mahoney appears unaware that it or any of the events caused by it exist. Henry, who is now a firm believer in the store's magic, leads Mahoney to realize that she is able to revive the store's magic by magic of her own. She notices this when she touches the piano. The shop is delighted and colorfully revived as Mahoney finally takes her position as owner and unlocks her creative potential, unleashing a celebration of the shop's wonders. It is implied that Mahoney has completed her first musical composition. (The background music is "Everything's Magic" by Angels and Airwaves.)
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