No, the elves are not suppose to be dead, though you are only missing a couple minor quests from that. One of the quests could have given you a potentially nice bow and the elven merchant is good for bows and mithril armour (no strength requirements, so good for mages), but that's about it. The one essential elf will not be killed by the ghost (he doesn't show up in the village until you have the appropriate quest).
