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This is a new (in the last year or so) "freemium" business model which is turing out to be a very lucrative way for developers to make money in the new App Store mobile gaming world. It is all explained quite well in this blog post:
Most of these games don't require you to make in-app purchases to continue in the game, they just allow you to buy items to proceed in the game faster. Because the games are free, the developers get vastly more distribution of their games than if they were paid, and even though only a small minority pay for in-app purchases, the developers can make a significant amount of money off of them. This ends up being a win-win: developers get paid and get lots of exposure for their hard work and potentially millions of people get quality games for free which is subsidized by a small number of people with more money than time on their hands who want to proceed faster in the games.
Psst, 1 GBP = 1.5271 USD. We aren't in 2008 anymore.