QueryLocator is used when the scope is directly taken from a SOQL : 

Use the Database.QueryLocator object when you are using a simple query (SELECT) to generate the scope of objects used in the batch job. If you use a QueryLocator object, the governor limit for the total number of records retrieved by SOQL queries is bypassed. For example, a batch Apex job for the Account object can return a QueryLocator for all account records (up to 50 million records) in an organization. Another example is a sharing recalculation for the Contact object that returns a QueryLocator for all contact records in an organization.

Iterable is used when you need to create a complex scope for the batch job. You can also use the iterable to create your own custom process for iterating through the list.

Ex : example only showed a custom Iterator class, not the Batch Apex Class that would leverage such a class. You are correct in assuming that you would need two classes: your custom Iteration class plus a batch class that uses that class. The idea here is that the Force.com platform basically does this:

public class Database {
  public static void executeBatch(Database.Batchable batch) {
    executeBatch(batch, 200);
  }
  public static void executeBatch(Database.Batchable batch, Integer limit) {
    Database.BatchableContext BC = new Database.BatchableContext();
    Database.Iterator iterator = batch.start(BC);
    List<Object> items = new List<Object>();
    while(iterator.hasNext()) {
      items.add(iterator.next());
      if(items.size()==limit) {
        batch.execute(BC,items);
        items.clear();
      }
    }
    batch.finish(BC);
  }
}

Of course, the logic that the Force.com platform uses has greater complexity, including resetting governor limits, etc, but this is the basic design of the Batchable/Iterator interface. As long as your iterator returns the correct values for hasNext and next, it can iterate through any sort of set of data you could imagine, including mathematical sequences, extended search results from a service such as Twitter, and other large data sources.