Clicking on the add image button will open a pop up dialog box that looks like this:
There are three locations you can choose to add an image from.
Once you have added media to your page you can also add it to a gallery, which will display thumbnails of your media on the page and provide links to the individual files. This is handy if you're using multiple images on the one page for example. This is covered in greater detail in the Add Image To Gallery section