Apple's goal is to sell the iPad to people who already have a desktop, but don't feel like they need a full-blown laptop.
For people who want a full-blown laptop, Apple still sells those. If they made a $800 iPad fully capable of replacing a $1200 MacBook, they'd be in trouble.
No, they wouldn't be in trouble. The laptop form factor will always have the advantage of a physical keyboard and higher performance or battery life as compared with the iPad form factor. $400 sounds a bit smaller than the expected Apple markup to get those two advantages, which probably indicates how much more miniaturized the iPad components are compared with the MacBook. If you compare the iPad to the MacBook Air, which is similarly miniaturized, you get a $700 disparity, of which about $500 can be attributed to the difference in form-factor and the resulting expectations, and about $200 of which go to performance and storage improvements that aren't consequences of the relaxed size and weight limits.
For people who want a full-blown laptop, Apple still sells those. If they made a $800 iPad fully capable of replacing a $1200 MacBook, they'd be in trouble.