Although alveolar epithelial cells play a critical role in the pathogenesis of pulmonary fibrosis, few practical in vitro models exist to study them. Here, we established a novel in vitro pulmonary fibrosis model using alveolar organoids consisting of human pluripotent stem cell-derived alveolar epithelial cells and primary human lung fibroblasts. In this human model, bleomycin treatment induced phenotypes such as epithelial cell-mediated fibroblast activation, cellular senescence, and presence of alveolar epithelial cells in abnormal differentiation states. Chemical screening performed to target these abnormalities showed that inhibition of ALK5 or blocking of integrin αVβ6 ameliorated the fibrogenic changes in the alveolar organoids. Furthermore, organoid contraction and extracellular matrix accumulation in the model recapitulated the pathological changes observed in pulmonary fibrosis. This human model may therefore accelerate the development of highly effective therapeutic agents for otherwise incurable pulmonary fibrosis by targeting alveolar epithelial cells and epithelial-mesenchymal interactions.