As Tom said, explain prints how the query-optimizer sizes your query up.
How expensive the optimizer estimates your query has nothing at all to do with how many rows there are in the table (it doesn't know that yet). A sequencial scan is always the most expensive thing it can do, so it must scale that in pretty high.
And yes, the fact that the query optimizer doesn know the seize of the tables does have it's drawbacks, because on very small tables the optimizer could decide that using an index will be less expensive even if it actually takes longer to read the index than to do a sequencial scan.