cache level refers to the number of downsized images PS saves in the memory to facilitate viewing and editing when the view is zoomed out...
when you zoom out from 100%, to say 66.7%, if the cache level is set to 0 (not a possible figure but illustrates my point), PS has to churn out the visible image everytime you edit the image. If cache level is set to 1, PS saves a downsized image of the image at 66.7%, so you can actually work on the image at this zoom level, and PS can display the changes as it would be visible from 66.7% instead of constantly churning it from the 100% image. This speeds up editing, especially for large images.
higher cache level settings merely is an extrapolation of this, ie.
at 2, zoom of 66.7% and 50% is saved;
at 3, 66.7%, 50%, 33.3%;
at 4, 66.7%, 50%, 33.3%, 25%;
at 5, 66.7%, 50%, 33.3%, 25%, 16.7%;
at 6, 66.7%, 50%, 33.3%, 25%, 16.7%, 12.5%;
at 7, 66.7%, 50%, 33.3%, 25%, 16.7%, 12.5%, 8.33%;
at maximum 8, 66.7%, 50%, 33.3%, 25%, 16.7%, 12.5%, 8.33%, 6.25%.
of course, nothing comes free...the cache is saved in your memory so if you don't have much memory, its best to use a smaller figure...