iPhone mini makes sense. There are millions of 3,5" iPhones and every app is optimised. Apple could keep both 4" regular iPhone and make a cheaper, 3,5" mini iPhone. If they keep the same thinness and dimensions of top/bottom black bars as in current iPhone 5, the iPhone mini would be definitely the smallest iPhone ever produced. Many many people WANT small and tiny phones. iPhone mini could be a great entry level iPhone. It would also help Apple to quicker get rid of legacy dock connector iPhones and sell just the iPhone 5 and iPhone 5 mini.
By the way, about naming - it's getting messier with every year. With hindsight I think they should never have attached any number or letters to both iPhone or iPad. We would differentiate them all simply by generations. 1st, 2nd, 3rd and so on. Like iPod touch. Much less confusion. The "new iPad" name still creates confusions. For example, I see resellers selling The new iPad and 4th generation iPad side by side.
By the way, about naming - it's getting messier with every year. With hindsight I think they should never have attached any number or letters to both iPhone or iPad. We would differentiate them all simply by generations. 1st, 2nd, 3rd and so on. Like iPod touch. Much less confusion. The "new iPad" name still creates confusions. For example, I see resellers selling The new iPad and 4th generation iPad side by side.