ABSTRACT
This chapter introduces the reader to concepts, examples, and techniques of stochastic dynamic programming. It describes the inventory problems and production control problems more precisely, first in the context of the simpler deterministic dynamic programming model, then in the stochastic case. The chapter illustrates the dynamic programming technique that is used to solve problems in which control is exerted over finite time. It extends the problem to control over infinite time, with a discount factor incorporated into each time period. The chapter also discusses a related problem, called the optimal stopping problem, and also stochastic dynamic programming problems. It provides applications of stochastic dynamic programming, featuring problems of inventory control and optimal control of stock portfolios.
