The graphics memory is not only used when running multiple applications. It is only used when the software you are using requires it.
In most cases, the computer manufacturer has already configured the system to use the maximum amount of graphics memory that is possible for your particular computer model. Sometimes you can change these values through BIOS level.
Check with your computer manufacturer if there are tips on increasing the amount of graphics memory for your computer model.
If you are interested in additional information see graphics memory frequently asked questions:
Alright. Well I'm just curious then, why an application (such as a laggy video game) would not benefit from using a larger amount of the graphics memory (i.e why it would use only 260MB when 1.7 GB are available). Is the application just not optimized to run on this hardware?
The reason an application uses a certain amount of graphics memory instead of the total amount of 1.7 GB is because your computer manufacturer has already configured the system to use the maximum amount of graphics memory that is possible for your particular computer model. Furthermore, the amount of video memory depends on your computer manufacturer, and not the application.