step 1, put your cursor where you want the picture to go in. Click on the little picture frame in the tool bar. On my screen the little picture is next to the blue underlined word "Link"
A list of words, and a blank square will appear.
now, this is the method I didn't know about until you told me:
Step 2 make sure the words "Upload files" on the left is orange, and click on the words "choose files" which are more or less beside them.
Step 3 Navigate to where you chosen picture(s) is(are), click, and wait for it(them) to load into the blank square. Once it (they) has(have) appeared, click on it (them) to select it(them), and then click on the words "add selected"
The picture(s) should magically appear on your page. If you click on the picture now that it is on your page, you can change the size, put it to the left, centre, or right, and add a caption.
I tend to use pictures from my phone. So I upload them onto picasa. At the instruction Step 2 above, I select picasa web albums, and then choose the picasa album I've uploaded the picture to, and then select them that way.
If you are lucky, you can right-click on a picture on a web page, copy, and then paste it into your blog. This sometimes goes cranky, and then the formatting options don't work properly, and it thinks it is a "link" and not a "picture" and then it when you wish you hadn't done that, you can't delete it properly. That doesn't stop me from trying, especially creative commons pictures from Wikipedia.