OS X Updates
These are updates normally gained through the App Store that update the current OS version you have installed by one increment point at a time (in most cases)
As this is posted in Lion (OS X 10.7.x) it will increase the basic first release (OS X 10.7) to OS X 10.7.1
Later at the next release you will be advised by the app that there is another update and you get updated to OS X 10.7.2 when you run it.
If you ignore these single point updates or buy a computer that has been sitting in the store for some while you can get COMBO Updates which includes everything from the base version to the current release.
Updates are free.
Each sub version of the OS (OS X 10.0 through to OS X 10.8) has had differing amounts of incremental updates.
Snow Leopard (OS X 10.6.x) went to OS X 10.6.5 where as Leopard, which preceded it went to OS X 10.5.8
Certain Apps like iChat get their updates in some of the OS Updates. That is to say not every OS update includes an iChat Update but when iChat is updated it is in an OS Update.
Other Apple App such as Safari and iTunes tend to have their own Update schedules that are separate from the OS ones.
OS X Upgrades.
Upgrades are the ones that move OS X, lets say 10.4.x (Tiger) to the next named version OS X10.5.x (Leopard)
These Upgrades cost.
In the case of Lion and Mountain Lion that can be done though the App Store app these upgrades will be to the current updated level of the OS. In the case of Mountain Lion that is OS X 10.8.3 at the time of writing.
This is set in System Preferences > Software Update.
This triggers the App Store app to check on whichever frequency you have chosen.
Lets say you download and Install Firefox as a browser.
This has a setting in it's Preferences that deals with Updates.
Other apps may have menu items that you can chose to "Check for Updates"
iMac 2.5Ghz 5i 2011 (Mountain Lion 10.8.3)
G4/1GhzDual MDD (Leopard 10.5.8)
MacBookPro 2Gb (Snow Leopard 10.6.8)
Mac OS X (10.6.8),
Couple of iPhones and an iPad
"Limit the Logs to the Bits above Binary Images." No, Seriously