Small sensors mean everything in the camera also scales down. Focal lengths to get the same field of view need to shrink (that Leica for example appears to go from 4.7-17.7mm which on a bigger sensor is incredibly wide-angle even at the telephoto end). Apertures are expressed as a fraction of the focal length, so f/1.8 on that Leica (assuming it's at the 17.7mm end) is the same aperture (in mm or inches) as f/5.1-ish on a 50mm lens used, for example as the normal lens on a full-frame camera. That's a very ordinary aperture, used when you want to get a large object all in focus, or you want to freeze the action by having a shorter shutter speed. And the 17.7mm is actually equivalent to 90mm on a full-frame camera, so f/1.8 at 17.7mm is the same as f/9.2-ish there.
Consequently smaller-sensored cameras don't have the ability to isolate objects using selective focussing, or express speed through the blurring of either foreground or background as well, but thanks to the improvements in chip manufacturing, the sensors actually only introduce unwanted noise equivalent to a larger sensor of a few years ago, and large sensors back then were already pretty damn good, so noise on a small sensor is less of an issue than it used to be. The above reasons, as well as all the extra controls you get on a larger camera are the reasons people pay more for larger sensors these days, as well as FUD about well sizes and noise.
Note: I don't do these sort of calculations for a living, so I'm on a little shaky ground here, but I think I've got things the right way round.
