People who buy a smartphone all use it as a smartphone. Each person uses different apps, but in the end it's a smartphone. That's why there's only 1 iPhone, from Apple's point of view there is no other way of making an iPhone that's better than the iPhone they currently make.
An iPad, however, is multifunctional. It can be used for reading, gaming, productivity (a bit), browsing, etc. Different ways of using a device might raise the urge for different sizes. For example, reading books is much more comfortable on a 7" device than on a 10" iPad.
Apple's vision of the future, the post-PC era, is full with iPads. The tablet market is rapidly becoming bigger than the PC market in number of sales. In this future, where iPads are everywhere being used for everything and the PC becomes more and more obsolete, different sizes makes sense.
That's why the iPad Mini is going to happen and that's why it's going to be Apple's next blockbuster.