setup()

[snippsat]

where does 'setup.py, reside?

You miss the point,you make setup.py
If look at my tutorial that has been posted before.
Making the first wheel i have setup.py and power.py is same folder.
In setup.py i point to py_modules=['power'] module which is file power.py.

Then i make wheel.
python setup.py bdist_wheel --universal
I do not mention Source Distributions(sdist),because wheel is the preferred way.
But can make zip file with same setup.py bye running.
python setup.py sdist --formats=zip