How much does memory REALLY help?

I bought my MBP with the 1GB chip pre-installed. I just ordered the other day another 1GB chip from Crucial as I usually had 2GB installed on my WIndows machines. After taking a look in the Activity Monitor at the memory usage, I noticed that rarely, if ever, is all of the RAM used up. There is always a sizable chunk left, around 300-500MB. As of right now, I have Safari Mail and iChat open, editing photos in Photoshop, and burning a 1 hour DVD on iMovie. There is at the moment, also 340MB of free RAM. My question is, if the computer has free RAM with all of these applications open, how will an extra GB help? I understand that the computer will be able to move stuff from the VM into RAM for faster access, but in terms of application performance, will anything really change? Is there any way to get the system to utilize that empty space that I currently have?

I bought my MBP with the 1GB chip pre-installed. I just ordered the other day another 1GB chip from Crucial as I usually had 2GB installed on my WIndows machines. After taking a look in the Activity Monitor at the memory usage, I noticed that rarely, if ever, is all of the RAM used up. There is always a sizable chunk left, around 300-500MB. As of right now, I have Safari Mail and iChat open, editing photos in Photoshop, and burning a 1 hour DVD on iMovie. There is at the moment, also 340MB of free RAM.
So right there, in your example, if you hadn't installed that extra 1GB of RAM, you would be swapping 684MB of data to the disk that's now being handled by RAM.
You want some RAM to be free. That allows doing one more thing without suddenly finding yourself swapping things to disk.
I checked Activity Monitor after reading your post and had similar numbers. I was at that time using Dreamweaver, Safari, Mail, Adium, BBEdit, my timeclock software, and good old AppleWorks 6. I had about 500MB of RAM free according to Activity Monitor. To see what would happen, I launched Photoshop and opened two files I've been working on: one very complex layered PSD file and a flat file that has a Quick Mask I'm editing. Activity Monitor immediately changed to show me 126MB free RAM.
So you can see that it depends on how many apps you have open and what you're doing in them. If you work with programs like Dreamweaver and Photoshop a lot and work with large or complex files, more RAM is definitely a plus. If you work with a lot of programs, more RAM is certainly a plus. And having some not in use means you're not already maxed out - that's a good thing.
If you never come close to using all of your RAM, perhaps you really do have more than you need. But in your own example you're utilizing the additional RAM you installed - that's good. You needed it.  

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