The author Miguel de Cervantes is busy in his study, reading. When he falls asleep, his muse Dulcinea appears and conjures the figure of Don Quixote in his dreams. Cervantes wakes up, and, inspired by the vision, begins to devise a new idea for a novel. His barber arrives to shave him as usual, but Cervantes is too worked up for such things, and sends him away. Characters from Cervantes’ earlier books appear and grow jealous at the new hero. The servant announces Sancho Pansa, Cervantes’ friend and neighbor. Cervantes tells Sancho about Don Quixote, and starts to dress like the new hero in his excitement. His lively description stirs the story to life. Cervantes takes on the role of the hero: Don Quixote, a man with no patience for injustice who is willing to challenge it at all costs. Cervantes begins to tell Sancho Pansa his story.

In the village
Lorenzo, an owner of a tavern, prepares for a day of work with his wife Carmen. Their daughter Kitri greets her friends Pepa and Eva, and they begin to dance. Basilio, the barber, joins in the fun. Kitri and Basilio are clearly in love, but their flirtations are blocked by Lorenzo, who has other plans for his daughter. Kitri tries to convince Lorenzo to let her marry Basilio. When the father asks Basilio if he has the money to support Kitri, Basilio admits that he doesn’t have a penny. He promises to earn a fortune as a barber. Lorenzo refuses. Just then, Camacho, a wealthy admirer, makes a grand entrance. He tries to win Kitri over with his courtship, but she and Basilio make off at the first
opportunity.

The toreros return from the corrida. Their leader José Antonio dances with his lover Mercedes. Then, Sancho Pansa interrupts the festivities. He is leading a horse with Don Quixote asleep on its back. The villagers make Sancho the brunt of their games until Don Quixote intervenes. Kitri and Basilio arrive, and Don Quixote believes that Kitri is his true love. She is flattered by his chivalry as he dances with her. All the villagers join in. Amid the uproar, Kitri and Basilio escape.

A band of travelers
Kitri and Basilio meet a band of travelers. Initially wary, the travelers sympathize with the young couple after learning their story. Kitri and Basilio disguise themselves just in time before Lorenzo, Camacho, Sancho, and Don Quixote arrive at the camp. The travelers’ king invites their new guests to enjoy the dancing, which tells the story of a couple in love, forbidden from being together because a wicked, rich man stands in the way of their love. Don Quixote is so horrified by this injustice that he begins to fight anything in his path, even tilting a windmill. Eventually, he is struck down and falls asleep, exhausted.

Cervantes appears and laments his sorry hero's fate.

In the dreamworld of the Dryads
Dulcinea appears and dances with Cervantes. She leads him into the dreamworld of the Dryads, where he meets their queen. Guided by Cupid, he follows the elusive Dulcinea in her various forms. Cervantes is inspired once again. He wakes Don Quixote and Sancho Panza, and sends them on their way.

In the tavern
Eva and Pepa, José Antonio, Mercedes, and the other guests have gathered in the tavern. Kitri and Basilio arrive, and their return is celebrated with dancing. Lorenzo, Camacho, Sancho Panza and Don Quixote join in. Lorenzo tries once more to convince Kitri to marry Camacho, but she refuses. Basilio tries again to persuade Lorenzo to change his mind, but to no avail. Full of despair, Basilio pulls out his barber’s knife and feigns his own death. Kitri, in on the prank, mourns his loss, until Basilio is revived and they all laugh together. Kitri asks for Don Quixote’s help in obtaining her father’s
blessing to marry Basilio. Despite his own love for Kitri, Don Quixote acts valiantly, forcing Lorenzo under threat of his lance to give his blessing. Now nothing can stand in the way of the wedding. The whole village takes part in the celebrations.

Cervantes looks over the happy scene. Satisfied, he sits at his desk and begins to write his novel.