My two year old has a dry scalp. What can I do to treat this?

Little dab'll do you. Try a little dab of olive oil on the scalp. Think about what you're using to wash your kid's hair. Could the shampoo be drying out the scalp?
Seborrhea. This is seborrheic dermatitis (yes, it does occur in children), and should respond promptly to a mild anti-dandruff shampoo (head & shoulders or something similar). Avoid tar and salicylic acid shampoos, which are too harsh for young children. And with all respect, please don't apply olive oil; it will only make it worse.