Many processes (such as chemical reactions) are reversible. If, at a given temperature, those two processes occur at the same rate, a dynamic equilibrium will form.

A simple thought experiment;

place a bucket filled with water in a small room. Water from the bucket will evaporate, and the air in the room will start to become saturated with water vapour. Eventually the air will be completely saturated with water, and the level of water in the bucket will stop falling. However, water from the bucket is still evaporating. What is happening is that molecules of water in the air will occasionally hit the surface of the water and condense back into the liquid bulk water, and this occurs at the same rate at which water evaporates from the bucket. This is an example of dynamic equilibrium; the rate of evaporation equals the rate of condensation.

The concept of dynamic equilibrium is not limited to simple changes of state such as that described above. It is often applied to the analysis of chemical reaction kinetics, to obtain useful information about the ratios of reactants and products which will form at equilibrium.

This term can also be used to refer to a steady state (i.e., a state which isn't a true equilibrium, but does not change with time) This can only happen if the system is in contact with an environment which is not in equilibrium.