Having problems at home with his wife Diane (Marcia Strassman), struggling inventor Wayne Szalinski (Rick Moranis) has created an electromagnetic shrink ray - unfortunately it only seems to make things explode. While at work, his neighbor's son, Ron Thompson (Jared Rushton), hits a baseball into the Szalinskis' attic window and activates the shrink ray. He and his older brother Russ (Thomas Wilson Brown) and Wayne's children, Amy (Amy O'Neill) and Nick (Robert Oliveri), go up there to retrieve it. Luckily, it got stuck in the machine and blocked one of the laser components, resulting in it only releasing enough energy to shrink things instead of blowing them up, and the kids, a nearby couch, and chair are shrunk by the beam when it fires.
As Wayne comes home from a presentation at the lab, he notices his children and "thinking couch" missing. Without an explanation for this occurrence, he begins to get angry at the machine for being joked about at work. He begins to destroy it as the kids, now 1/4 of an inch tall, try to get his attention but to no avail. He begins to sweep up the mess and accidentally dumps them into the trash with it. They escape it and find themselves at the far end of the backyard. Knowing that crossing it to get back to the house will take hours at their size, they begin to climb a flower to see how far the house is. While clinging to it, Nick and Russ are attacked by a bee. They cling to it for dear life and are separated from Ron and Amy.
Russ Thompson Sr. (Matt Frewer), Ron and Russ's father, is getting aggravated at his missing sons since he was planning a fishing trip with the family. Russ, who secretly likes Amy, often feels small compared to his dad's standards since he was cut from the football team (although it is revealed later on that he actually quit it). While looking at the attic floor, Wayne finds his "thinking couch" in a miniature form. He soon concludes that he shrunk the kids. Diane comes home and he tells her this. She becomes infuriated with him and tries to help search for the kids.
Meanwhile, Wayne accidentally turns on the sprinklers while searching for the kids in the backyard. Giant splashes of water soon surround them. Amy begins to drown in the muddy water near the flagstone while Wayne stops the sprinklers. Russ saves her before she dies and gives her CPR. The four children continue their journey. On their way, they find a cream cookie in the yard. As they eat some of it, they meet an ant who befriends the group, nicknamed "Antie" by Ron. Wayne and Diane decide to tell Russ Sr. and Mae (Kristine Sutherland) about the shrinking of their children. They are not pleased, but Mae seems to understand more. At the end of the night, the children decide to sleep in one of Nick's blue Lego bricks. During the night Amy and Russ admit their feelings for each other and share a kiss, but are interrupted by an attacking scorpion. Antie is stung and fatally wounded by the scorpion's stinger while trying to rescue them, though they scare it off by bombarding it with stones and sharp sticks (Ron is able to put out two of its eyes). They comfort Antie who within moments dies from the poison.
In the morning, Nick's friend, Tommy, comes to mow the lawn (as part of a deal he made with Nick at the beginning of the film). The children hear the lawn mower and descend into a wormhole to escape. Wayne and Diane rush outside to make him stop, but unfortunately he does just as the lawn mower is over the hole. It sucks the kids out of it. They are not killed, but barely fail to get Wayne and Diane's attention. They realize that their voices are too high and quiet to be heard by them, but that they can be heard by Quark, the Szalinskis' dog. They hold on to his fur and ride him back to the house.
While Wayne is eating a bowl of Cheerios with milk, Nick accidentally lands in it when Quark jumps on the table. The group try to get Wayne's attention as Nick is about to be eaten. Quark bites Wayne's leg, who freezes with the spoon halfway to his mouth. Looking through a magnifying glass at it, he sees Nick. The kids communicate to their parents that the baseball went through the window and started the shrink ray. Armed with this information, Wayne pieces together how the accident made it work and brings the kids back to normal size after testing it by shrinking and regrowing Russ Sr.
A few months later, during Thanksgiving, the two families share an enlarged turkey together and are happy. Russ Sr. has come to terms with his son quitting the football team, the two dads become friends, Wayne and Diane patch up their problems, Nick and Ron finally become friends, and Russ and Amy begin dating. The movie ends with Quark eating a giant milk bone as a Thanksgiving treat. But as the movie begins to black out, it suddenly reopens to Nick, realizing a joke that Russ made earlier about learning CPR in French class. The movie closes with him laughing, getting the joke.