Just to add my 2¢. It's been well covered in many discussions before, but...
Free:
TextEdit is great for basic documents, as mentioned it does have quite a lot of formatting tools, and saves as RTF. It can also open most Word documents too. Perfect for a simple letter, or indeed recipe
Open/Neo/Libre Office. These are all derivatives of OpenOffice, and supposedly a substitute for MS Office. However, IME they are no better at compatibility than Pages overall, and just as complex as MS Office.
Cheap:
Pages is brilliant IMHO, I use it for everything from simple letters to a 28 page monthly magazine for a church. You can switch between word processor or document layout modes - it sounds confusing, but actually makes working with a document easier as it emphases the style you need to work in. It opens and saves Word documents and is far easier and quicker to work with IMHO.
Costly:
MS Office is really the only option if you have to have full compatibility. However, MS Office is often not completely compatible with itself, especially if you send documents across platform or versions.
There are a few more too, might be worth looking into, such as Bean or AbiWord, but you can spend more time that its worth mucking about. For my money, I'd try out TextEdit, and get Pages if that's not got enough.
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Andy Hewitt