The dwarves and the elves originate from Norse Mythology.
The dwarves lived in their own part of Midgard, a place no human could find. They were small people, often pictured as little men with long beards, who were master smiths, and made the swords, shields and armor for the gods themselves.
The elves lived in a deep forest nearby the castle of Frøy, the god of fertility, called Alvheim. They were fair and beautiful, and commonly seen as peaceful creatures.