The Gelatin is only for those people who prefer a thicker custard like yogurt...and you are right it is cheaper without the Knox gelatin...and I haven't tried this particular recipe without the gelatin, but I am sure it would work without the gelatin, because I tried other yogurt recipes without the gelatin and they came out just fine, but for me they were a little too thin...(I just like mine a little on the thicker side)
BUT the extra powdered milk that you add to the measured milk also adds "some" thickness to your yogurt, especially if you are using powdered milk and not a richer milk...and you also get the benefit of some extra calcium and protein...
I was amazed at that making yogurt from powdered milk tasted so good as yogurt, I had my doubts at first but was pleasantly surprised! My daughter and husband could not believe that I made it from powdered milk......Good Luck...