Beforehand, the teacher places the pictures inside of the top hat with the hat sitting upside down on a table in front of the class. The teacher explains that creating stories is like magic. When you write a story, it lets you magically become the hero that saves the day. The teacher then taps the brim of the hat with the magic wand and then pulls out one or more of the character/hero pictures from the hat. The teacher shows the picture(s) to the class and explains who it is a picture of if they don't already know. The teacher continues to say that not only do stories let you magically become the book's hero, but when you write stories you can choose to become whatever hero you want. These heroes are the story's main characters.
The teacher taps the hat again and pulls out a picture of one or more of the fun or exotic places, and then explains that stories can magically whisk you away to far away places. These places are called the story's setting. When you write a story you can transport yourself and your reader to any place or setting that you want. You can let your readers feel like they have really traveled to that place or setting by describing what it looks like, or even how it smells, feels (i.e. warm, cold, windy, etc), sounds, or tastes (i.e. salt water) like.
The teacher than asks the class if a character and setting are all that you need for a story. After the responses die down, the teacher states that most stories start with a problem or challenge that the hero must resolve. The teacher taps the hat again and pulls out a picture of one or more of the challenges/problems. The teacher explains that a story's problem can be any kind of problem; an ordinary everyday problem or an extraordinary problem. It just needs to make the story interesting and somewhat believable. The main part of the story will be the hero trying to solve the problem--this is known as the plot. The hero won't usually solve the problem on the first couple of tries, but the story usually ends when the hero finally solves the problem. The teacher explains that the initial problem, the journey the character takes to try to solve the problem, and the ultimate resolution of the problem all comprise the story's plot (Note: for younger grades, you can simplify this section by not talking about "plot" and just referring to it as the story's problem).
The teacher then hands out the pieces of paper and asks the children to try to identify and write down the character, setting, and plot in the book Brave Little Monster as it is read to the class.
As an optional activity, the teacher can lead the class in a spontaneous story creation exercise. The teacher asks the class to suggest a hero. After the hero is decided on, ask for a setting. After that, ask for a potential problem. With the problem decided on, ask the class for ways for the main character to solve the problem. For the first two suggestions, narrate how the hero tries to solve the problem with those suggestions and then make up reasons why they don't work. Select a third suggestion and narrate how it ultimately solves the problem.