Let me start with this example from the WLDC:

Dynamic[ ] > Applications > 1st example:

Constrain the coordinates of a point to lie on a circle:

DynamicModule[{p = {0, 1}}, Graphics[{
   Dashed
   , Circle[]
   , PointSize[0.1]
   , Point[ 
     Dynamic[p, (p = Normalize[#]) &] 
   ]
  }, PlotRange -> 1.2, Axes -> True, ImageSize -> Tiny]
]

Comments:

1. The text is clear, it makes the intention clear. Or at least I think so. Well, I am understanding: We want to constrain a (given? any? dynamically given? interactively given?) point to lie on the circle (radius 1, center at {0,0}).
2. Where can we observe the dynamics? Or where is the interactivity? The initial point is given with {0,1}. This point already lies on the unit circle! And the point cannot be moved or anything with my mouse. So i really don't see any dynamics or interactivity here.
3. To constrain a point to lie on a circle with some dynamics, maybe the function Locator[ ] should have been used in the code?
4. Maybe this example is not to demo interactivity with the mouse or any kind of dynamics? However, edit the code and use the point p = {-1, 1} in the module initialization. You will see that the point is drawn outside the circle, i.e. neither the function Dynamic[ ] nor Normalize[ ] do their job. Seems like.

At this point it is impossible for me to suggest an improved code and/or text which makes this example (input and output) clearer to the reader, because i clearly seem to be missing something. What am i missing here?

Hello Kuba, thanks for the pointer. Yes, now i can see what is happening there, the dynamics, the functionality of the code. Wow.

Many subtleties and implications regarding the Dynamic[ ] command are still half a mystery to me but i'll just have to re-read the respective documentation over and over again until it all falls into place, i hope ;-) .