Increase in activity = increase in caloric intake?

You need to fuel your body, just like Michael Phelps has to.. now thats not saying eat 4000 calories.. but if your intake is around 1200-1400 and your burning 500-700 calories your net calories are pretty low, thats why MFP gives you those calories back cause they already factored in your deficit to lose the weight you wanted..
Now some people can lose with big deficits, but then some people will hit a nice plateau and have the scale not budge.. usually you don't want to have a huge 1000 calorie deficit cause that can slow your progress ( or stop it ) but the decision is yours.

The calorie goal that MFP gives you to start with is based on the assumption that if you do additional exercise and log it, you will eat back those calories. Otherwise, MFP would have given you a larger calorie goal to start with. If you try some different online calculators that factor in exercise with your overall activity level (MFP doesn't) then you'll probably find that they give you a larger calorie goal for weight loss.

There is such a thing as having too large of a calorie deficit. The body is only going to let go of so much fat at a time. Having a huge calorie deficit makes you more likely to lose lean mass (muscle) along with the fat. Unfortunately this happens anyway with weight loss, but having a moderate calorie deficit can help to preserve as much lean mass as possible while you lose. People who are very obese and have large fat stores can get away with larger calorie deficits, but the closer you get to a healthy weight, you need to be more careful. If you have about 50 lbs to lose, then 1.5 lbs a week is probably a good rate of loss for you.

You will find differing opinions (and hundreds of threads) on this topic, but this is the basic way MFP is set up. This thread is in one of the "stickies" at the top of this forum: http://www.myfitnesspal.com/topics/show/10589-for-those-confused-or-questioning-eating-your-exercise-calo Ultimately, it's up to you, but it helps to have all the information. One thing to bear in mind is that if you are using MFP's database to estimate calorie burn - it can be very inaccurate so a lot of people only eat a portion of those exercise calories back, in case of overestimation.

I'm 5'9" and have been steadily losing at between 1700 and 2000 calories a day. You will probably lose weight doing what you are doing but is it healthy? No. Your body needs fuel to do thinks like circulate your blood, digest your food, grow your hair and nails... Good luck.

The dietician I talked to told me that 1200 was too low, I was told to go to about 1500. Eat good carbs, and that I don't HAVE to use those extra calories!! I'm 5'10 and a bit heavier then your current weight!!! I had the same concern! Good Luck!!!