How does iTunes handle its library?

[NewSc2]

I'm having a hard time understanding it. It seems like iTunes makes a copy of my mp3 (in the Downloads folder, for example) in its iTunes Library folder.

One time, however, I deleted one of the two mp3's, and then iTunes lost the mp3. Another time I deleted one of the two copies and my playlist still works fine.

Is there some sort of preference I can check to have iTunes move all music in the playlist to iTunes's library? or the other way around? (not store music in its library)

 

[WildCowboy]

There are some options in Preferences --> Advanced --> General that you might want to have a look at.

In particular, there's an option to copy files to the iTunes Music folder when you add them to your library. I have this option checked, so if I have MP3s on my Desktop and add them to iTunes, it puts a copy of the files in the iTunes Music folder. I can then delete the ones on my Desktop.