In casual situations, you say "Don't be ridiculous!" when someone says something that's totally wrong. It means "that's not true!" It's especially used when someone says something untrue about you or accuses you of doing something wrong. For example, you can use this phrase when:

• You left out the leftovers from dinner for an hour after you ate, and your wife is worried that they're not safe to eat now. You think it's perfectly safe.
• Your son is worried that he might not be able to get into the university he applied for. He says that there's no way he'll get in. You want to cheer him up.

The word "ridiculous" means "funny" in a way that's totally impossible and unbelievable.