Clue: the software for the iPod touch wasn't found in the street either.

Which, umm, is why it also retails for more than its parts cost.

I suppose the question is, why is the iPhone over $500 more than the iPod touch? Is there really that much hardware/software differentiation between the two to justify the increased price?

I suppose the ability to make calls and access data almost anywhere makes it that much more valuable to people, or they would not be able to price it as such.

A lot of it probably deals with a plethora of byzantine patents needed to manufacture a mobile phone.

It's amazing what happens when you price things according to how much people are willing to pay as opposed to how much it cost you to make.