Relationship between Vds and Vgs- MOSFET
There are three basic regions of operation for a MOSFET. Simplifying a bit, they are:


Cutoff (Vgs &lt; Vt) -- No current flows from drain to source.
Linear (Vgs > Vt and Vds &lt; Vgs - Vt) -- Current flows from drain to source. The amount of current is roughly proportional to both Vgs and Vds. The MOSFET acts like a voltage-controlled resistor. This region is used for switching. 
Saturation (Vgs > Vt and Vds > Vgs - Vt) -- current flows from drain to source. The amount of current is proportional to the square of Vgs, and is (almost) independent of Vds. The MOSFET acts like a voltage-controlled current source. This region is used for analog circuits like amplifiers.


In your circuit, R1 limits your drain current to about 1 milliamp, which is pretty small. It looks like it only takes a Vgs about half a volt above Vt to get that much current. If you want to see the relationship more directly, remove R2 and replace R1 with a much smaller resistor, or even just a current meter. This will let you apply a fixed Vds. Be sure to turn up Vgs slowly and carefully to avoid frying the transistor or resistor.