I think one of the disconnects when it comes to handmade items and their cost is what people compare the handmade item to.
Nobody is going to save money by hand-making anything that would be for sale in your average chain or department store. I am currently knitting myself a hat. Just the materials are probably similar in cost to what a hat like this would cost at, say, Target, so I'm not really saving money.
But if I compare it to a hat that is actually similar (made of good quality yarn and knitted in a somewhat complex pattern), I'm quite sure I'd spend a whole lot more than I would on a hat from Target, even if I was buying a hat from a different commercial retailer.
There's also the fact that I do a lot of handmade stuff because I can't find exactly what I want for sale (except from people who make custom items one at a time, and charge accordingly). If I could find what I wanted at mass-production prices, I'd totally buy it. But most things just aren't quite what I'm looking for, and often cost more (even at mass-produced prices) than I'm willing to pay for something that isn't quite what I really want. If I'm going to spend that much money on something, my thinking goes, I really want it to be as close as possible to my vision for the thing (whatever that vision is). The only way to get that is to either make it myself or pay someone bespoke-level prices to make it for me.