As well ask why any tragedy occurs in our world. The only answer that I can come up with is "God's Will". Melkor attempted to mold the Great Music to his will, only to be told by Illuvatar that he was only working for the greater plan. The Ainur understand little of the Third Theme, which dealt with the Younger Children. Illuvatar's designs apparantly intended the Two Kindreds to interact up through the Third Age, and then for Men to 'take over' Middle Earth until the Final Music at which the Children will sing with the choirs of the Ainur.

: And also, how did they dwindle? Did all the elvish men become impotent? Why did the elvish numbers become less, when they are basically immortal? You'd think that birth rates were higher than fatalities.

The Elves were immortal spirits. Their bodies could be slain, or they could succumb to weariness. In either case, their spirits then dwelt in the Halls of Mandos. As the Ages passed and Men multiplied, the Elves wearied of Middle Earth and departed. As far as birth rates are concerned, there was a very long time between generations. Consider: Elrond had three children in 6000+ years. That's a pretty slow rate of growth.

: Also, with their wisdom, power, knowledge, lore, hardiness of body, why would they dwindle? You'd think that they would have plenty to teach men, and plenty more to learn.

But men distrusted Elves, and Elves distrusted Men. All throughout the wars with Morgoth and Sauron, the majority of Men fought against Elves. Even the Numenoreans (with the exception of Elendil's Faithful) hated the Elves at the end. Likewise, the Men of Gondor had grown estranged from the Elves by the time of the War of the Ring. There was a brief Renaissance during Aragorn's reign, but in general, Men wanted nothing to do with Elves. So you have the choice of living in Middle Earth, distrusted and watching the world move on without you, or returning to Paradise, to learn at the feet of the Valar. Seems to me an easy choice.

Just my opinions, of course

Bacchus