The demand for bags
The reason these 16-slot player made bags sell for so much is that the majority of players at this point in the game have access to a main character that can probably generate enough gold to splurge on some quality-of-life upgrades. Typically, the demand for these bags comes in groups: you'll see five to 10 sales in a row from the same buyer. Every character has 6-bag slots and a bank to put bags into, and for people starting alts, it just makes sense to fill those up, especially when the bags are so cheap.
What is it about 16-slotters that's so appealing? Generally, it's the sweet spot in the tradeoff between space and cost. The next two slots, if they upgrade to an Imbued Netherweave Bag, are going to cost them considerably more than all the slots before it. It's a similar jump in price per slot every time you get a bigger bag. Looking at the the bottom of the curve, you'll find that people are willing to spend 6 (or so) gold on 16 slots, especially since it's usually only 2g or so more than a 14-slotter.
So I should stop selling bags?
Bags will continue to be profitable in Cataclysm. Despite the very low cost of the faction bags, they will not be immediately available. Generally, you'll be making more of your profits on mature players who are not on their first character, and these players tend to want to set it up once and forget about it. Truly new players who are on their first toon represent a much lower percentage of the population than they once did, and as such, even if they're a little thriftier about spending money on player-made bags when they could just do a few extra quests to get another city faction bag, it won't affect your bottom line much.
The general market size will actually increase in Cataclysm. One of the best ways to prepare for the expansion is to stockpile things that new alts will need, because everyone will be rolling a goblin or worgen. Bags are probably one of the most expensive player-made item that is needed by a new alt, and even players just getting to the end of the new starting zones will often want to buy at least a few. The first few weeks of Cataclysm, you won't be able to keep bags in stock.
What about after the first few weeks, though?
I'm pretty sure that in the long run, once the number of new alts being created has leveled out and Cataclysm has matured a little bit, the overall demand for bags will be lower because of this change. It will always be profitable for someone, but you will probably have to split a smaller pie among your competitors. It's always like this when Blizzard takes a player-created item and makes it easily available on the cheap.
The one characteristic about this market that makes it so appealing, however, won't go away. It's steady income; steadier than any of the endgame markets (flasks, gems, etc.), and even if it's a little slower because of the NPC bags, it'll still be attractive. Some of the best markets in the game cater to the needs of the never-ending supply of alts being rolled. If you don't believe me, drop by a starting area like Durotar or Dun Morogh and count the number of new characters you see created on a, say, Saturday night.
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