The play is set in Georgia, in the Soviet Union near the end of World War II. The protagonist of the play is Grusha, a young woman. The narrator of the story is Arkadi Tscheidse, a singer and storyteller who is renowned in the region; he begins the play by telling us a story about Grusha.

Arkadi talks about The Caucasian Chalk Circle, which creates a play-within-a-play structure. In this story, the coddled young son of the governor, Abashwilli and his wife, Natella, is left behind in a coup that removes the family from power. Grusha comes upon the helpless boy and, after trying to leave him with a poor serf woman, decides that she must care for him herself; as time goes on, she begins to think of herself as the boy's mother and intends to teach the boy to be a kind and conscientious young man. She flees town with the boy, Michael, to keep him safe.

Once the coup is over, Natella seeks to claim back her son, but Grusha will not give him up so easily. Thus, they are forced to go to court, where the character of Azdak comes in. He is a judge who devises a stunt whereby he can determine who deserves to have custody of the boy. Azdak says that Grusha and Natella should put Michael inside a circle they have drawn with chalk and pull on Michael's arms; whomever is able to pull Michael out of the circle will be declared his true mother. Natella begins to pull, but Grusha declines, because she does not want to cause Michael any pain. Grusha is then declared to be Michael's true mother.

So the main characters are Grusha, Arkadi (the narrator), Michael (the boy), Natella (the governor's wife), and Azdak (the judge).