Why is the iPhone so expensive?

The iPhone was the first real smart phone to be released to public. It had to demand a premium price compared to the less advanced smart phones that were available then such as Nokia phones. 

Apple's main focus , under the command of Steve Jobs, was to produce products having superior quality. Because Jobs believed the iPhone has superior quality he believed it must be sold for an expensive price. (See Why Apple has very high quality standards?)

When Apple released the iPhone it was targeting high-end customers because they can bring the company more profits. In order to target those people Apple had to make its Phone expensive. 

The iPod , which was also sold at an expensive price, was a very big success of Apple. Apple decided to maintain its successful strategy of focusing on high-end customers. 

Under Jobs leadership Apple's brand was seen as a brand that not everyone can afford to own. This branding strategy worked well for Apple and so the company decided to maintain it. 

Apple understood that a high price will give consumers the impression that the device is better than the competing ones. (See Why do some people love iPhones that much?)

Apple uses a Differentiation strategy in marketing which implies selling expensive products to help customers believe they belong to a special group.

Low-end phones have low profit margins. Apple wanted to avoid that problem by targeting high-end users who can bring higher profit margins to the company.

Apple knew that the expensive phones will attract the ones who want to seem special. By making its phone expensive it managed to attracted the right customers.