The time that 8GB flash memory become affordable as a medium for game, probably most game need more space than that. The code itself might not need a large space, but the audio and especially the graphics definitely will grow. Smaller games would probably be distributed digitally and larger game would use the most affordable medium that fits, which I think wouldn't be flash memory.
Note that while the above might be true, you have to look at a curve or trend in flash prices versus storage requirements to get an accurate picture.
I agree with your subsequent points about flash carts versus discs and I'd like to add a few more. An aspect to bear in mind are the hidden costs of DVD/BR or perhaps the hidden benefits of flash aside from the more obvious RW benefit: some of these are functional while others are financial. With flash you get uniform read-speed (and usually higher than disc media though I'm not all too intimate with BR speeds) so developers won't need to spend time optimising the physical location of assets and streaming parameters to take advantage of angular velocity - based media. Obviously, anything that saves development time will also save money or raise quality.
Likewise, flash-based (as in USB-pen like) media would allow much smaller game cases. Whereas today the size of the case is constrained by the size of the disk (120mm), moving to a USB-pen sized media would mean the new constraint would probably be the size of the manual. Instead of today's portrait oriented manuals we could see a return to landscape-oriented like the old NES game manuals. Smaller cases means less shelf space, less storage needed to maintain stock, more efficient transportation, etc. I'd be willing to bet that all of these savings would bring the total cost of media production/logistics very close to current disc-based games.
And then there's related but external cost savings that you have to factor like no longer requiring such a large/heavy/power-hungry component as an optical disc reader unless you also want your console to serve as a (legacy) home theater. I say legacy because unlike games, movies can be easily streamed along with monolithic digital distribution so they can benefit a lot more readily from that. Please note this doesn't necessarily mean mass-adoption of movie DD will occur sooner than games DD - there are other, social rather than tecnical, considerations that are more influential in bringing about this change.
Anyway, removing the optical disc at least for some console models has obvious benefits like lower price, smaller case, lower power consumption, lower noise, or a combination of these.
Having said all that, there's a massive investment made in disc reproduction plants so I personally don't believe we'll see this in the next gen (aiming for 2012). There may be an hybrid disc/DD model but going straight to flash would be a suprise for me; a welcome one.