I have set up photoshop elements as external editor in iPhoto but I cannot get the edited photo to open in iPhoto. When I save the photo Elements asks where do I want to save it and iPhoto is not an option.

I have set up Photoshop Elements11 as the External Editor in iPhoto just as Terence Devlin said. However when I save the edited photo it does not appear in iPhoto. A drop down menu asks where I want to save the photo and I do not know what to choose. Also should I choose, "save" or "save as"? I should be really grateful for your help.

I suggest opening iPhoto and reverting back to iPhoto in the Preferences for photo editing. Quit iPhoto. Restart your Mac for good measure. Open iPhoto and again choose Photoshop Elements in Preferences as the editing app.
As far as editing, I don't have PE, but I have another editing app form the Mac App Store, ColorStrokes. I have been experimenting with using it for editing iPhoto photos and it works flawlessly. After setting ColorStroke as the editing app, I open a photo in iPhoto and click the Edit button in the menu bar below the photo. Color Stoke immediately opens with the photo and I complete my editing. When I have finished editing I choose to Save the photo, leave the name the same and agree to replace the iPhoto photo of the same name. I quit ColorStroke and the photo in iPhoto now has all of my edits from ColorStroke.
Should I decide that I prefer the original photo, I open the photo in iPhoto and choose Revert to Original in the Photos pulldown menu.

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