As Klasma said and provided evidence for, the original SE was at least partially about size. Obviously, Apple is straying from that though.
What do you mean smaller phones have been historically cheaper to produce? That doesn't make any sense. The only reason they might be cheaper to produce than larger phones is lower cost of raw materials, but that difference in cost is not really going to change over time. Unless the cost of raw materials have plummeted so much that the difference in raw materials cost is now negligible. But that hasn't happened. And in fact, smaller tech can be more costly to produce than bigger tech. Miniaturization can make things more difficult and therefore more expensive.
But much more relevant than the difference in raw material cost difference is the difference in production cost. The relevant principle here, which you actually alluded to, is that OLD phones get cheaper--no matter the size. When the production cycle matures, things get more efficient and therefore cheaper, which is why SEs use previous generation phones. So it was no coincidence the SE1 was small--it was simply because the previous generation iPhone was small.
