Q: On the drop down menu used to illustrate changing your screen saver it shows Photo Library as an option. On my Mac I can't see this option and would very much like to. How do I correct this?

If you go to the Applications folder>System Preferences>"Desktop and Screensaver">you should see a window like the one shown below, where you can see "iPhoto" on the left column AFTER you select the drop down file, in that column, named "Files":

Your instructions appear to be for setting a Desktop picture. The problem many of us are having is that we can no longer select our iPhoto Library as the source of our Screen Saver. 

For some reason, this just happened to me overnight. I've always used my iPhoto library images for a screensaver, then all of a sudden it was displaying stock images. I didn't change any settings, and now I can't select the iPhoto Library from Source. 

Pick a screen saver that uses photos, then choose Photo Library… from the Source menu.

This is where it gets maddening. I've gone through every slideshow option, however none of them present me with the "Photo Library" option you have highlighted.

Do you get the media browser in the open file dialog, like when you try to attach a file in Mail?

I'm not sure where to go from there, but wondering if the system has lost track of your Photo Library.