This adjustment is to correct the tonal range and color balance of an image by adjusting the intensity levels of image shadows, mid-tones, and highlights.
In the Levels dialog box, the outer two of the three Input Levels sliders, map the black and white points to the settings of the Output Levels sliders. By default, the Output Levels sliders are at level 0 and level 255, respectively. With the Output Levels sliders in the default positions, a user could adjust the parameters as follows.
Move the black input slider to A so as to map all the pixels with their levels equal or lower than level A to level 0, i.e., discarding black details. Move the white input slider to C to map all the pixels with their levels equal or above level C to level 255, i.e., discarding the white details. The remaining levels are redistributed between levels 0 and 255. Such operations increase the tonal range of the image and the overall contrast.
The middle input slider is to adjust the gamma value in an image, as well as the intensity value of the middle range of gray tones. Moving it to the left makes the image lighter. This adjustment maps a lower level up to the mid-point level between the Output Levels sliders, and here it is 128. The shadows expand to fill the tonal range from 0 to 128 while the highlights are compressed.
Tips: Drag the Output Levels sliders to set the output tonal range, to which the Input Levels are mapped.