The plot begins with a group of Westerners fleeing civil unrest in China. Among them is British diplomat Robert Conway, his brother George, paleontologist Alexander Lovett, swindler Henry Barnard, and terminally ill Gloria Stone. Their plane is hijacked and crashes in the snowy Himalayas. They are rescued by inhabitants of Shangri-La, a secluded utopian lamasery high in the mountains. The group is initially intent on leaving but slowly becomes enchanted by the serene and progressive community, which is governed by the ancient High Lama.

As they adapt to their new life, they uncover the secrets and philosophy of Shangri-La, learning that it is a place where people live extraordinarily long lives under conditions designed to promote humility, pacifism, and ecology. An urgent dilemma later divides the group—some wish to stay in the idyllic paradise while others yearn to return to civilization. The story explores themes of paradise lost and found, choices between material success and spiritual fulfillment, and the eternal quest for peace and happiness. The dynamics shift dramatically as motivations diverge and relationships are tested, leading to a critical turning point around midway through the narrative.