You have merely run into the mechanics of supply and demand. If blue items didn't take annoying (i.e. difficult to acquire) reagents, then everyone would flood the market with easily crafted items. As you observed, an oversupply drives down prices and leads to market stagnation.
The real world solution is to get the government to establish regulations and licensing requirements that limit your competitors. This allows you to charge higher prices because other people can't get into the market. Then you need a government subsidy to provide your raw materials cheaper so you can make even more money.
Okay, so this won't work unless you have a friend at Blizzard. So you're hosed. I suggest finding something more lucrative to do, like grinding mobs for gold. This will help you make more money, and help your competitors too.
Of course, you could also post these suggestions in hopes of discouraging your competition into leaving the market. Propaganda works in the game world, too :).