If a mobile phone has internal storage of say 512mb, that clearly isnt enough to run apps and stuff. But If there was an option to increase the storage with a micro SD card how does this work?
I.e if i were to install one or two apps on the phone and this used up the 512mb and then used a 32gb SD card, would I be able to install many more apps?
The 512MB that you're referring to, is a completely different kind of memory to the 32 gig SD card. The SD card is just an external memory source, for storing data such as pictures, videos, etc.
The 512MB memory prob refers to the ROM .... see the following link for more details:
http://androidforums.com/htc-hero-sprint/13022-ram-rom-what.html
... just realised that depending on the phone in question, its external memory may only be 512MB, I'm assuming that the 512MB is referring to its "working" memory, as most phones nowadays have quite a decent external memory ????