Scene 1 begins with a monologue by Shen Te, explaining to the audience that after the gods gave her money, she bought a tobacco shop from Mrs. Shin. Mrs. Shin enters and demands that Shen Te give her some rice and money, weeping and accusing Shen Te of robbing her when Shen Te protests that she hasn't sold any of the tobacco yet, so there is not enough money.
An elderly husband, wife, and their nephew enter. Shen Te explains to the audience that they put her up in their home when she first arrived in Setzuan, but that they threw her out on the street as soon as she ran out of money. Rather than do the same to them, she lets them come in. Soon enough, an unemployed man enters and asks for a free cigarette; Shen Te gives it to him, but the husband, wife, and Mrs. Shin ironically criticize her for being too generous.
The next person to enter is a carpenter, who demands a hundred silver dollars for the shelves he installed in the shop while Mrs. Shin owned it. When Shen Te asks him to have patience, he starts to take the shelves back. The wife suggests that Shen Te let her "cousin" settle the affair when he arrives, inventing the character of Shen Te's cousin on the spot. Shen Te feels ashamed that she cannot pay the carpenter for his work.
Now the wife's brother and pregnant sister-in-law enter, and Shen Te welcomes them as well. They are followed by Mrs. Mi Tzu, who introduces herself as Shen Te's new landlady. She demands references from Shen Te, and since Shen Te has none, she goes along with the wife's lie about her cousin who does not exist. She names him Shui Ta, and the wife, husband, and nephew all chime in to support her lie. A grandfather and a niece of the unwanted family show up as well, and then the whole family begins to help themselves to Shen Te's cigarettes. The grandfather sings "Song of the Smoke" to pass the time and to "keep Shen Te's spirits up."
The sister-in-law reveals that the brother pawned the family's only sack of tobacco to buy the wine they are all drinking now; the husband is appalled and starts a fight with the brother, knocking the shelves over. There are voices at the door: it is an uncle of the family, and he says the auntie and children will be arriving shortly. Scene 1 ends with Shen Te singing, "The little lifeboat is swiftly sent down. / Too many men too greedily / Hold onto it as they drown."
In Scene 1a, Wong dreams of the gods in his den in a sewer pipe. The first god tells him that Shen Te took them in, and Wong feels ashamed for having given up and run away. The gods sing to him about how he is a "well-intentioned, and yet feeble chap," scolding him for "hasty judgment" and "premature desperation." They instruct him to find Shen Te and encourage her to continue being good.
Scene 2 begins with the arrival of Shui Ta. It is just Shen Te disguised as a man. He fools the family that has been staying in the tobacco shop, even though they know they invented this character. He tells them to leave. The husband instructs the boy to steal food from the bakery nearby and the boy leaves to do so.
Shui Ta begins to bargain with the carpenter about the price of the shelves, finally convincing him to settle for twenty silver dollars instead of the exorbitant one hundred he was demanding from Shen Te. The wife is laughing at the carpenter's misfortune when Shui Ta demands that she and her family leave as well. When they do not comply, Shui Ta opens the door on a policeman. When the boy returns with stolen goods from the bakery, the policeman arrests him; the wife and husband betray the boy by denying knowing anything about the stolen food.
Mrs. Mi Tzu arrives and introduces herself to Mr. Shui Ta. She demands six months' rent in advance, and when Shui Ta protests, Mrs. Mi Tzu brings up Shen Te's questionable profession of prostitution. The policeman returns and Mrs. Mi Tzu leaves without settling the problem of the rent. The policeman proselytizes about Shen Te and how she made her living selling "love."
A little old woman enters to buy a cigar for her husband, to whom she has been married forty years. The old woman, policeman, and Shui Ta draft up a marriage advertisement for Shen Te; the policeman has decided that marriage is the only way for her to get enough money without having to be a prostitute.
The interaction of the characters in Scene 1 introduces more irony. Mrs. Shin, the husband, and the wife have all taken advantage of Shen Te's kindness, but when the unemployed man enters and she gives him one free cigarette, they scold her for being too generous. Shen Te recognizes this irony and treats it with humor, laughing and asking Mrs. Shin for her rice back. After the niece has entered, the wife tells Shen Te, "Give me the key. We must protect ourselves from unwanted guests," as if her whole family were not unwanted there!
The suspicion of others is a character trait common in The Good Woman of Setzuan; it is contrary to the quality of "goodness" for which the gods are searching. Though the unemployed man asked for a free cigarette, after he leaves the husband says, "I bet he had money on him." When Shui Ta arrives at the beginning of Scene 2, the sister-in-law immediately loses faith in Shen Te, declaring, "So we've been cheated. Where is the little liar?"
Shen Te reveals that, even though she is a prostitute, she has more inherent "goodness" than do any of the other characters in Scene 1. She feels regret that she cannot pay the carpenter for the job of installing the shelves in the tobacco shop; in contrast, the wife is suspicious of him and reveals her own dishonesty by saying, "He'd tear the dress off your back to get his shelves. Never recognize a claim! That's my motto."
The gods reveal a bit more about their definition of "goodness" in Scene 1a, during their interaction with Wong. They ask him to find Shen Te and "show interest in her goodness - for no one can be good for long if goodness is not in demand." This reveals that they recognize how difficult it is to be good without support from others. However, Shen Te provides her own support, in the form of her invented cousin, Shui Ta. When the carpenter asks him to call Shen Te because "she's good," Shui Ta answers, "Certainly. She's ruined."
Throughout the play, characters burst into song. Sometimes the songs are recognized as such by the characters, as in Scene 1 when the grandfather sings "Song of the Smoke." The refrain is, "So what's the use? / See the smoke float free / Into ever colder coldness! / It's the same with me." Scene 1 ends with singing by Shen Te, though it is apparently not noticed by her rude house guests. This song, "The little lifeboat is swiftly sent down. / Too many men too greedily / Hold on to it as they drown," is a commentary on the greediness of the characters around her and how impossible it is to help everyone in need. In Scene 1a, the gods sing to Wong in his dream as a way of chastising him for having no faith in Shen Te.
The theme of love as a weakness is introduced in Scene 2 as the policeman describes the problem with Shen Te's lifestyle. "Miss Shen Te lived by selling herself... it is not respectable. Why not? A very deep question. But, in the first place, love - love isn't bought and sold like cigars, Mr. Shui Ta." This is also a reference to the play's original title, "Die Ware Liebe," which translates to "Love as a Commodity."