I find it really off putting, how weak is their hardware, compared to a normal Android phone in a similar price range.

Weak hardware can work quite well with optimized and non-bloated software (which doesn't constantly phone home). For example, maps and Youtube work smoothly on Pinephone with SXMo. See also: https://puri.sm/posts/the-danger-of-focusing-on-specs/.

I hope so, but I just don't understand what exactly causes such massive price difference.

Is it because this kind of phones are a very niche product so they can't benefit from the economy of scale?

Maybe android phone manufacturers can get better deals from chip manufacturers because they buy chips in large quantities?

Yes exactly that. The weak hardware at those prices are the best they can afford. The economy of scale that they can afford let's them charge that little for flagship phone and still makes money. People won't put their money where their mouths are, we're all too cheap to pay what things are really worth.

It's not just this but there are also devices that can be sold artificially cheaper because advertisers are the real customers

Niche product, non-standard components, strict requirements of free drivers with GNU/Linux support: https://puri.sm/posts/breaking-ground/

If you like privacy without security then yeah .

There is no security in a vacuum. Security depends on your threat model. I use Firefox with NoScript and never run untrusted apps on my Librem 5.