Each update is the full iOS operating system.
Typically, when you update a desktop (Windows or Mac) OS, you just get the changes (patch or delta update). Apple chose to provide all iOS updates as the full OS, rather than just the changes.
I suppose that's because Apple felt it was a safer, more robust, easier-to-manage process. Users simply download and install one file, and whatever version of the system you're on, you know it's complete and correct.
Prior to the advent of the iPhone. mobile device software updates were very chancy, and required a level of understanding and technical competence. You'd get multiple versions of the same update, depending where in the world you were and what features you wanted; you'd get separate updates for the basic OS and for the radio; the installation processes was multi-step and had severe bricking risks. So the Apple process was, at the time, a breath of fresh air. It was easy to understand, didn't need any technical knowledge, and was consistent.
However, for some time, there would only be 2 or so iOS updates a year - one for the new version, usually in June/July, and one bug-fix/feature-add; the iOS files were smaller (around 200MB originally); and there were less variations in version for different devices (which probably affects file size).
Now we get more frequent updates (3 in the last couple of months), and the files are 600MB+. iOS 4 is more complex than previous versions, hence the increased file size; and its complexity may well be creating room for more bugs (hence the more frequent updates).
There is a suggestion that iOS5 will include the ability to update over the air (i.e direct to the phone, rather than via iTunes). That presupposes that the updates will be as patches/deltas, since 600MB (more, probably, since each iOS version is bigger than the last) is an unreasonable over-the-air download, both for users and carriers.
If that happens (only speculation thus far - nothing official from Apple), that will help those of us who have less-than-perfect broadband (in my case, I get reasonably solid 2MB connection, but I have to update 3 different devices, so I get the pleasure of 1.8GB of download).
If the over-the-air method comes to pass, I suspect we might get an option - take just the changes over the air, or take the full file via iTunes.
Hope all that makes sense