The main purpose of a search engine is to help people find content on the internet. Therefore common sense should tell you that the content of your site is an important factor in search engine optimization. In reality content is one of the most important and often overlooked factors when it comes to SEO.
The main reason that content is so important for SEO is that the search engines love content. In general the site with the most content is going to get a better ranking. Obviously it is more complicated than that and there are a lot of factors that go into rankings but content is an important one. The reason for this is that the search engines are striving to give the searcher the best and most relevant information on the term they searched for. Common sense, or at least the search engine algorithms, would say that the site that has the most content must be the most authoritative on the subject and have the best content. Therefore this site should rank the highest. You can definitely improve your rankings by adding new content to your site.
The other main reason that content is important for SEO is that the search engines need to have someway of determining what your site is about. They are going to do this by looking for keywords in the content of your site. Obviously the more content that you have the easier this is going to be. The easier that you make it for the search engines to determine what your site is about the more likely it is to rank well. Of course this depends on your content being relevant and focused on the keywords that you are targeting. If you have content that is properly written for the keywords that you are targeting there is a good chance that it will rank well simply because the search engines will see a lot of content on a particular subject and assume that your site is an authority site.
One benefit of having lots of content on site is that it allows you to get traffic for keywords that you never set out to target. There are all kinds of keywords that nobody tries to target when they are building websites. Usually because everybody does keyword research in the same way. That means that search terms that don't show up on the keyword tools usually aren't targeted. That doesn't mean that these terms aren't searched for. In many cases you can get a great deal of traffic for keywords that you never targeted but just appear in your content naturally. Obviously the more content that you have the more of these terms you will get traffic for. In some cases you can get a great deal of traffic from these terms just by putting up a lot of content without the need to go out and get links for your site.