The shortest documented adult ever became only 54.6cm (21.5"). Even though this is quite small, I'd say it is definitely way too large to be able to fly with (butter)fly wings. I could rather imagine bird or bat wings. I also assume you cannot simply gain a human in a form as tiny as one wants to imagine as many of our organs probably have a limited minimum size to function properly. You'd have to change the internal body massively and throw out anything not absolutely necessary. Also they'd probably not as slim but rather have a stocky body and a quite oversized head.
Retaining human intelligence with a brain a fraction of the size of ours is hardly possible. They may have a slightly improved efficiency but barely anywhere close to human intelligence. Also a more efficient brain would raise the demand of energy so they'd have to eat and sleep very much. In addition to the high energy demand for their flying ability I'd say that's a very limiting factor.
As for your last question, that's a matter of supply and demand. Since human teeth are like ivory to them they create jewelry from, less people believing in fairies mean less teeth and thus higher value per tooth.
The much more important question is: why would such a creature develop? Did they develop out of a hominid or an insect, and why would it shrink and develop full wings but not change anything else (or vice versa, why would it change its body into the human form)? The human body has specialized to living on the ground and it's obviously totally ineffective and useless if it was able to fly.