Here are my favorite exercises to teach the basics of music theory to preschoolers:

1.  My Turn, Your Turn – Rhythm
   Teacher says “My turn” and claps/speaks/drums a rhythm, then says “your turn” and the kids get to imitate.  For our youngest kids, this can just be two claps, or two stomps.  As kids get older, you can add more complicated rhythms.  It is often easier for younger kids to start with rhythms like “Tiki Tiki, Ta Ta” rather than using their bodies.  You can then add claps to the “Tiki Tiki”.
2. Piano Mouse, Forte Lion – Dynamics
   Sing a song like Ram Sam Sam and when the teacher holds up a Piano card with a Mouse, the kids sing quietly because Piano means softly and the mouse is quiet.  When he holds up Forte card with a lion on it, kids can sing loudly because Forte means loud and lions are loud.  There is another good explanation here.  And you can print out graphics here.  This is a great time to discuss the difference between singing/speaking loudly and screaming.
3. Writing music sentences – Pre-Reading and Music Theory
   Get the kids to suggest a series of shapes and assign a sound to each shape.  Then put it all together in a music sentence.  For example, use  a dry erase marker and board to write triangle, square, circle, heart and assign the sounds pop, boom, wiggle, yelp to each respectively.  Then point to each shape and say the sound together. You can have them do it slowly, quickly, softly (piano), loudly (forte), in different kinds of silly voices. This exercise hits so many educational objectives including teaching reading from left to right, encoding (learning that symbols can have sounds), memorization, putting sounds together in different ways. AND the kids LOVE this game.
4. Dynamics through Fire Trucks Sirens – Dynamics
   Preschoolers love firetrucks!  This exercise actually developed after they kept losing focus during music whenever there was a firetruck siren.  I decided to use it to my advantage and we began exploring dynamics by making our voices into firetruck sirens.  Start crouching down with a soft voice (oooo), let your voice grow with your body until you are reaching up high and at the top of your voice, mouth open wide (aaaaaaahhhhhh).  Then, let your voice and body come back down to a crouch and an ooooo.  For older ones, you can use a dry erase marker to draw a big, sloping mountain on the board and they slide their voices up and down the mountain.  You can make two slopes or even have them draw different kinds of slopes and try to follow them with your voice.
   I love to follow-up this exercise with the Fire Truck song by Old Town School of Folk.
5. Nursery Rhymes for rhythm
   Pick out well-known rhymes or songs and first say them using a steady beat. Then, beat out each syllable of the rhyme. Over time, you may be able to divide the room and one side keeps the steady beat and the other side gives a beat to each syllable.