Goudge was born in the cathedral city of Wells, where her father, Henry Leighton Goudge, was vice-principal of the Theological College. The family moved to Ely when he became principal of the Theological College there. There was a further move to Christ Church, Oxford when he was appointed Regius Professor of Divinity at the University. Elizabeth was educated at Grassendale School, Southbourne (1914—18), and at the art school at University College Reading, then an extension college of Christ Church. She went on to teach design and handicrafts in Ely and Oxford.
Goudge's first book, The Fairies' Baby and Other Stories (1919), was a failure and it was several years before she authored her first novel, Island Magic (1934), which was an immediate success. It was based on Channel Island stories, many of which she had learned from her mother, a native of Guernsey.
The Little White Horse (1946) was Goudge's own favourite among her works, and also the book which J. K. Rowling, author of the Harry Potter stories, has said was her favorite as a child. The television mini-series Moonacre and the 2009 film The Secret of Moonacre were based on The Little White Horse. Her Green Dolphin Country (1944) was made into a film (under its American title, Green Dolphin Street) which won the Academy Award for Special Effects in 1948.
After her father's death in 1939, Goudge moved to a bungalow in Devon, where she nursed her ailing mother. After her mother's death in 1951, she moved to Oxfordshire, spending the last 30 years of her life living at a cottage on Peppard Common, just outside Henley-on-Thames, where a blue plaque was unveiled in 2008.
Goudge's books are notably Christian in outlook, and cover such themes as sacrifice, conversion, discipline, healing, and growth through suffering. Her novels, both realistic and more fantasy works, all use inter-weaving legend and myth to create a very mythic ethos. Whether written for adults or children, the same child-like quality of myth and hope pervades Goudge's work and is the source of its appeal to readers.