If the OS runs out of RAM, it starts caching/paging the memory on disk. Disk is many times slower to read and write than RAM. This is the main reason why people notice their computers slowing down. The more spare memory you have, the more programs and information you can actively use without it slowing right down.
Mac OS has quite a small memory footprint compared with Windows (because MacOS is unix). For example, Windows Vista needs ~2Gb to itself before you run any programs; I think MacOS uses ~500Mb. So roughly speaking, a MAC with 2Gb is equivalent to a WinPC ~4Gb. Whether you prefer the look/feel/reliability/usability of either is a personal preference.