Do Apple Software Updates really take up as much space as it shows in the size column?
When you go to update your Mac software via Apple Update, each line item contains the size of the file. Is this the size of the download or the actual size it will take up once the update is installed?


It's the size of the download not the update itself. However, in the case of a new OS update, generally the file size and the actual install size is similar, since the OS updates normally replaces all files with new one's, and often can change a whole big set of files in one go.


  For example, say I have 1,000 MB of free space, and there's an update which says "200 MB" in the Size column. Generally, once I install this update, will I now have 800 MB of space left on my system?


It depends on the update. Most updates replaces the existing files completely, so the increase should only be by the amount of the stored download, and any additional space needed by new files, or increase of the file sizes of any existing files. 

Please ask if the above doesn't make sense


  Or is there a chance that this is not an incremental upgrade and it will replace existing files that are already taking up space on the system?


For few official updates are incremental. For the OS updates, the manual downloads offer two versions: 


Version 1 contains only the latest update, and is generally smaller. This will be downloaded if your only one version behind during the version check.
Version 2 contains all the updates from release 0. This is normally bigger, and will be downloaded when you are more then one version behind, irrelevant of the version your actually on.


The above applies to the OS updates

AppStore updates at the moment is always a complete full version of the new application being downloaded, the copy you have replaced, and the balance trashed.