Dynamic programming is used to solve optimization problems by breaking them down into subproblems. It solves each subproblem only once, storing the results in a table to lookup when the subproblem recurs. This avoids recomputing solutions and reduces computation. The key is determining the optimal substructure of problems. It involves characterizing optimal solutions recursively, computing values in a bottom-up table, and tracing back the optimal solution. An example is the 0/1 knapsack problem to maximize profit fitting items in a knapsack of limited capacity.