When you're in elementary school trying to remember which is fiction and which is non-fiction, they tell you to think of both fiction and fantasy starting with an "f." Fiction is fantasy and non-fiction is real (when you're in elementary school, that translates to the things you want to read and the things you don't want to read).
But the lines blur more than that, don't they? Obviously it's easy to categorize a book into either category (unless maybe some of the heavily fictionalized memoirs--those can dance right on the line between the two). What I mean is that the idea of fantasy being fiction implies stories like The Lord of the Rings or Treasure Island or The Phantom of the Opera. And yet the category of fiction also includes books that take place in the here and now (or the here and now in which they were written) with normal events that do happen to real people. Books that try and express the details and facts of real life, even if they are fictional stories.
Why? Why do that with a fictional story instead of a real, journalistic story?
Or why do we try not to write something real? Why do we choose fiction instead?
Because fiction is fantasy. It isn't mean to depict reality, only to express reality.
In expressing reality, sometimes fiction will show very real life characters in real life situations. Sometimes, though, there will be changes. Maybe something almost magical will happen to them at the end, something so great that it rarely happens outside of fiction. And changes like that also express reality because they express our wants and desires, our drives and values in life. The next step, of course, would be in the stories much unlike daily life--it is their themes, not the orcs and hobbits and elves, with which we can relate.
Fiction covers a wide range because it's an open door to expression.