Oh I know such a self-directed game with much better graphics than that.
Don't let the graphics fool you, this game isn't a basic 8-bit game, it is resource intensive. It frequently uses between 1-1.5GB of RAM when running, and it frequently suffers framerate issues when exploring new chunks. Making the graphics look better would just make an already resource hungry game even worse and it would have even greater difficulty running on older PCs. Presumably, it will be optimised in beta so as not to be quite as resource-hungry as it is now, but by that time changing the graphics would be a mistake as they have come to be part of its charm. A more detailed creeper skin wouldn't be able to express the same sense of threatening sadness that the current skin does.
Very true. Notch has also said that, even though they've hired an artist, the game's graphics will not become higher res or anything. It makes my Pentium 4 desktop chug already, even with the graphics turned down. It's really not hard to see why considering it's pushing a lot of polygons and has a completely deformable environment. I've noticed if you change the flow of any water it really nails your CPU--the water calculations seem to be pretty intensive. The light calculations are also known to cause some issues which are being worked on.
I'm sure there's some performance enhancement that could be achieved but I imagine the "easy" stuff (frustum culling, backface culling, etc.) has already been done. What's hard is optimizing loading/rendering when you can completely deform the landscape and immediately expose blocks that weren't visible before (think Creepers, TNT.)
For me, it seems like the biggest resource hogs are water and having a lot of chunks active at once. If you wander a great distance in a single session I believe all the chunks you passed through remain active and in memory for the duration of that session. This is pretty easy to optimize for single-player (purge all chunks from memory except the one the player is in and all adjacent chunks) but would be really tough for multiplayer. And I think that's the issue: development is currently focused on completing multiplayer so the game can go to beta. Performance enhancements that would only benefit single-player seem to be waiting for beta.