I think you've got a good idea to do fairs and shows. It can be hard to get people pay what an item is worth. My advice is:
~make small objects for sale, hat's etc. Large objects cost a lot in yarn (and labor), by the time you add up even the yarn, no one wants to spend that much on your object! The fact is, yarn for a sweater usually costs far more than a store bought sweater, so unless you're making a very unusual product for an eager market, it's best to do small projects. Generally small things sell better because they're approachable in price, and are also faster to make, and less investment for you.
~Another good route to consider is pattern designing. Write up any designs you invent yourself, and make sure you get good pictures before even thinking of parting with them. Designing is satisfying, because you create it once and can sell the patter over and over, if you have a means to sell it. Marnie MacLean (one of our mods here) has a knitting blog that gets especially good traffic, and she sells her own patterns online on her blog. They are "pay to download," so she doesn't even have to mail anything, and she uses paypal and an online pay-to-download system called payloadz. She says she's made better money selling them that way then if she were to sell them to a magazine. (I believe magazines pay $50-$250 depending on difficulty of pattern, that's what I've heard anyway). Another perk about designing, is if you approach a yarn manufacturer, they'll often agree to give you yarn for free to design your patterns because all yarn companies like to have designs done in their yarns!
One of my dreams is to have a section on this site where folks can put up their patterns for sale, and where folks can buy the patterns, and rate the patterns and comment on them etc. It would be a good venue for designers if I could get Sheldon to design such a complex system for me.