Your Mac shows 512K because it has the original 64K ROMs most likely. You actually have 1.5MB of RAM installed, it looks like. The mobo RAM chips have probably been replaced upgrading it to 512K and there's 1 MB on the MacMemory upgrade board. If you can find the original software that came with the upgrade, it will let you set up a 1 MB RAMdisk and copy the system & Finder to it. Speeds things up nicely. The other option is to obtain a pair of ROMs from a Mac Plus or 512Ke and install them. They will let you directly address the whole amount of installed RAM. To check whether the mobo is upgraded, check the 16 identical chips under the front edge of the upgrade. If they are labeled something...4164...something, you have 128K. If they are ...41256... you have 512K on the mobo itself.
Apple's original 64K ROMs didn't support more than 512K of memory. The Plus ROMs support up to 4MB of RAM.
In any case, you have a pretty rare early Mac with an early upgrade. Congrats!