You are correct. Libraries themselves don't store your files or folders. Instead, they point to different folders on your hard disk, or on an external drive attached to your computer.
Any changes made inside the included "my docs" folder in the library will also be changed at the original "Z:\my docs" folder as well. However, if you just open the "Documents" library folder only, then anything saved only into it, and not in any other included folders, then it will only also be saved to the default save folder
library with the included Sample Pictures
("C:\Users\Public\Picturesfolder\Sample Pictures") folder is a perfect example of this. The default save folder for this one is "C:\Users\(user-name)\Pictures".