I've this inquisitive doubt of methods devoted IP Addresses are designated for every single blog produced using Wordpress. Does WordPress allocate separate servers for each blog (which sounds silly) or will they use any kind of redirecting technique?

By having an HTTP/1.1 request, the browser transmits the hostname (www.example.com) towards the webserver within the headers. The server then takes that hostname and routes it towards the appropriate configuration for your host.

This produces a single web server, on one Ip, to host multiple domain names.

The way in which wordpress does its likely a lot more complex, but this will provide you with a concept of what it is done.

http://en.wikipedia.org/wiki/Virtual_hosting