Most people couldn't imagine the iPhone 4's retina display either, but Apple did it. I used to doubt Apple's engineering capabilities, but not anymore. I wouldn't put anything past them. The display that the iPhone 4 has didn't exist till it launched, so I figure this is no different.
It's not just their engineering, but their scale. Buying 1 or 1,000 or even 100,000 of a cutting edge component can be expensive. But when you can put in guarantees on 1M+ of an item, you can seriously drive down prices.
With the iPod thie is one reason why companies like Archos, iRiver, and even MS couldn't compete with Apple. Apple got preferred pricing based on volume that no one else could touch.
If the iPad has that resolution I guarantee 10M units shipped in 2011, and that's probably conservative. No other tablet can come out and confidentally even think they could ship half that number.
The same is true of flash memory. During the heyday of the iPod, Apple was the world's largest purchaser of flash memory, and would pre-order a year's worth of production, at significant discount.
It's the cycle that kills Apple's competitors in the consumer market: 1) Apple sells millions of a brand new device, 2) this allows Apple to order millions of components, 3) cheap components drive down Apple's costs, 4) Apple can then lower the product's price but still retain a high margin, 5) Apple sells millions more because the feature & price one-two punch is too much to overcome.
Most people didn't have enough imagination, then. The Nokia N770 had a 800x480 pixel screen in 2005. It was more surprising to me that the original iPhone launched at such a low resolution and took so long to upgrade.
