System dynamics is a method of analysis that involves, rather than breaking a subject of study up into smaller and smaller pieces, looking at the subject as a whole entity. The central concept to system dynamics is understanding how all the objects in a system interact with one another. A system can be a computer, a bank account, a basketball team -- any entity with parts that can relate to one another. The objects and people in a system interact through feedback loops, where a change in one variable affects other variables over time, which in turn affects the original variable, and so on.
An example of this is a bank account. Money in the account earns interest, which increases the size of the balance. Now that the balance is larger, it earns even more interest, which adds more money to the balance. This goes on and on. This is an example of a reinforcing loop. Another example of a simple feedback loop which we have all experienced is adjusting the water tap to reach a desired temperature. You turn the faucet, feel the temperature, and compare it to the desired temperature. You continue to adjust the water, with smaller and smaller adjustments, until you converge on the desired temperature. This is an example of a balancing loop.
System dynamics attempts to analyze the basic structure of a system and thus understand the behavior it can produce. Many of these systems and problems which are analyzed can be built as models on a computer. System dynamics takes advantage of the fact that a computer model can be of much greater complexity and carry out more simultaneous calculations than can the mental model in the human mind.
The field of system dynamics was invented in 1956, by Dr. Jay W. Forrester who started the System Dynamics Group at the Sloan School at MIT. The System Dynamics in Education Project, under the supervision of Dr. Forrester, is widely acknowledged to be the best source of introductory information and educational materials about system dynamics.