Because it uses the same components as android phones which you can buy for $100.
It's amusing how people here actually think its a good thing that apple is making huge profits. That means people who are buying iphones are getting ripped off.
Of course it's a good thing that Apple is making huge profits. The company runs healthy, and the consumer gets great and innovated products.
If you really believe the Android is cheap and most appropriate for you, just go buy an Android phone then.
As for the iphone, when you buy one, you are not getting ripped off: you pay a premium for the most advanced interface (which is patented and I.P. of Apple) as well as the best hardware. When you buy a DVD do you feel you are getting ripped off? The dvd only costs some cents and you pay like $20 to get one. When you d/l an album from itunes, you are getting ripped off? A digital album, full of 0s and 1s costs $0 but sells for $10. So, do you feel like getting ripped off?
Fortunately there are manufacturers out there that offer cheap alternatives (Nokia) just not Apple.