$209 for an outdated iTouch2G is not cheap - they've already recouped all the fixed costs associated with it tenfold (R&D, manufacturing tooling, programming, advertising, etc), and are running it at purely a manufacturing+distribution cost vs revenue. The same goes for all of its components, meaning that it's cheaper to make now than it has ever been. Also, don't forget that part of the cost of the newer iTouches is included to fund iOS updates and device support. The 8GB iTouch is no longer supported in 5.0 and future updates, and therefore Apple isn't incurring any running cost on it either. If I had to guess, I'd estimate their cost per unit sold at only ~$60, if even that much.
At the end of the day, however, something's value is worth the price that people are willing to pay for it. If you feel that it's worth spending $209 to get one, then that's up to you. But don't think for a second that it's cheap.