After some in-depth research into the development of various humanoid races, I've developed a corpus of theory as to their development. Upon my return from their habitat, I plan to publish the following in some sort of respectable journal, perhaps the Journal of Edible Races. While snoozing off their weekly dinner of ponies, I'm sure the other dragons will enjoy reading it over:
Naturally, all the humanoid races descended from some common bipedal primate. Since then, however, they have evolved into two species, with a total of five subspecies (plus three common hybrids. Broadly, these can be divided into the larger-statured humanoids: the humans, orcs, and elves, and the smaller statured humanoids: the dwarves and halflings. These two populations are not known to interbreed and produce offspring, so they should be considered separate species, but the subspecies interbreed regularly, producing some interesting hybrids.
Humans (Homo Sapiens Sapiens)
Humans are predominantly farmers in fertile regions. They are believed to be the least differentiated stock of the homo sapiens branch of humanoids, being smaller than the hill-dwelling orcs and larger than the forest-dwelling elves. Over the past few million years, they've been engaging in low-level farming from small villages, trading regularly with both orcs and elves for resources. Recently, they've begun to domesticate some wild horses, which are driving both the development of larger societies and rapid technological improvement.
Orcs (Homo Sapiens Moria)
The orcs, unlike humans, do not rely on farming. They form hunter gatherer clans in upland regions inhabited by large animals such as oiliphants and griffins. It's believed that their hunting of these creatures has led to their evolving much stockier frames than their lowland counterparts. The breed freely with humans, producing half orcs.
It's not known if orcs and elves would be capable of producing offspring, as they do not regularly come into contact with one another. If not, then homo sapiens is a fascinating example of a ring species.
Elves (Homo Sapiens Lorien)
Elves have adapted to forest life, with small, slight bodies but surprisingly powerful arms. They live largely in homes built in the branches of large trees and coming down to the ground to hunt for game and to collect fruit.
In general, elves undertake these activities at night, possibly due to the presence of bands of forest-dwelling humans during the day. This nocturnal/diurnal duality allows elves and humans to coexist peacefully, and has also driven the elves to develop larger ears and pronounced eyes to better sense in the dark. They interbreed with humans where their ranges overlap, but this is looked down on by both humans and elves, probably due to the facts that elven frames are poorly suited to farm labor and that humans don't operate well during twilight hours.
Homo dwarfus has two subspecies: the dwarves and the halflings. These two races can interbreed, with the cross generally being referred to as the gnomes.
Interestingly, unlike half-orcs and half-elves, the gnomes have formed their own societies of multi-generational gnome families. It's viewed as likely, based on this, that they may develop into what could be considered a subspecies of homo dwarfus in their own right.
Dwarves (Homo Dwarfus Dwarfus)
Short and stocky, the dwarves have evolved for life underground. Like orcs, they are commonly found in hills and mountains, but have opted for a different evolutionary path.
Dwarves build elaborate warrens beneath the Earth, bringing many families together for mutual defense and child rearing. Moving through both natural and artificial tunnels has selected for short, powerful frames with large noses for drawing in more of what is often poor quality air. Dwarves have evolved a farming culture similar to humans, but in absence of good food crops growing on the surface, the dwarves have taken to gathering nutrient poor plant materials, such as grasses, in large store rooms underground. These materials are then used to grow nutritious mushrooms, as well as to brew alcohol in great quantities.
Unfortunately, the same behavior that has brought about these fascinating behavioral changes has also given dwarves a keen interest in mineral treasures, as is known by dragons across the land who have had to deal with dwarf infestations in their treasure chambers.
Halflings (Homo Sapiens Hobbitus)
Some dwarves, however, have moved back to the surface, and evolved into a small race known as the halflings. While retaining the burrow-building behaviors of their ancestors, halflings have moved to lowland areas where they have learned to farm from nearby humans. While incapable of interbreeding due to having fully speciated, humans and halflings form intermingled societies in some areas, with halflings appreciating the protection their larger neighbors provide and humans enjoying the fact that generations of life underground have left the halflings as experts at digging and brewing a large variety of fermented drinks.
Halflings, without the pressures of a harsh life in the mountains, are generally slighter of build than dwarves, and have lost the exceptional senses that dwarves have developed for a life underground.
Unfortunately, some halflings seem to have retained the dwarven penchant for treasure. Care should be taken to make sure that any halfling populations living in the vicinity of dragons do not become a nuisance.
In areas where halflings and dwarves live somewhat close together, they occasionally crossbreed, giving birth to hybrids known as gnomes. Gnomes retain dwarven senses, but with the slighter builds of halflings. In many areas, they've taken up roles as go-betweens for these two groups, as well as trading with any humans, orcs, and elves in the area.
In their wide exposure to many cultures during their lives as nomadic, traveling merchants, the gnomes have also picked up a penchant for combining and improving upon inventions created by the other humanoid races. They've also gained some sense in their travels, rarely pilfering from the homes of dragons, though this fact should be well known to anyone in posession of one of their excellent anti-dwarf horde security systems.