I am new to Apple Music and Would like to know how apple music stores music as my space on my mac keeps going down with more music being added though i have cloud space .

From the look of things your media is stored in the old iTunes Media folder ~/Music/iTunes/iTunes Media. Your active music database is likely to be in ~/Music/Music/Music Library.musiclibrary. You can potentially select content in your library, right-click, and use Remove Download to free up local storage while keeping the items in your library. I would recommend you backup your own media to an external drive before removing downloads just in case a matched cloud version proves to be a mismatch.

tt2

The media folder is the location where new media is created, e.g. CD rips, downloads, or conversions of existing content. For a legacy library it is, like yours, ~/Music/iTunes/iTunes Media. On a clean install of Catalina or Big Sur the media folder would be ~/Music/Music/Media. That is what it would change to if you clicked the reset button. If you've removed most of your media then I would be tempted to reset the media folder, then consolidate (File > Library > Organize Library > Consolidate Files) so that your Music library is no longer dependent on the old media folder. You should repeat with any video content in the TV app consolidating that to ~/Movies/TV/Media. Any podcasts, books, or audiobooks that are in your old iTunes Media folder will likely have been copied into private libraries for those apps. You could archive what remains in your iTunes folder to an external drive before removing it completely.

~/Music/Music/Music Library.nusiclibrary is the equivalent of the old ~/Music/iTunes/iTunes Library.itl file that you're no longer using, but only for music. ~/Movies/TV/TV Library.tvlibrary is the TV library.

You are best leaving the Copy files to... option enabled. This ensures that if you import media from say a USB drive it will be copied into the media folder, and continue to work when the USB is removed. It will also allow you to use the remove download option while retaining access to the matched or uploaded copy. This function is only valid for content inside the media folder.

tt2

Almost. You would reset the media folder in Music making it ~/Music/Music/Media, consolidate to bring in any stray locally stored music (of which there probably isn't any, but do it anyway), and then you would be able to delete ~/Music/iTunes/iTunes Media/Music. If you can confirm that you've also consolidated any video content into the TV app, and no longer need any other media (podcasts, books, audiobooks, tones, voice memos, etc.) that might be inside ~/Music/iTunes/iTunes Media/ then you can delete the iTunes folder and everything that it contains, such as old library files, artwork cache etc. ~/Music/Music holds your music library going forward. ~/Movies/TV would hold your video library.

tt2

I would probably treat the external drive as a backup. You can selectively download content for offline use using the cloud download links in the library. Anything that Music now downloads will go into ~/Music/Music/Media. If you're trying to avoid bulk data usage when downloading then it should be possible to add tracks from the external drive. The library should recognize when these are duplicates of an existing cloud item and merge the two together retaining play counts, playlist membership, etc. You can right-click and use the remove download option again for selected tracks if/when you want the space back.

tt2