Ticket Capacity is the total number of seats in your venue, or rather, the maximum number of people you can sell tickets to.
Ticket Type Limits control how many tickets are available to sell for that particular ticket type. Every ticket sold will be subtracted from the remaining capacity amount so that you don't oversell your show. It is not a limit for how many tickets a person may purchase at a time.
Let's say your theater has exactly 100 seats. Your town fire marshal loves to do surprise inspections, so you don't want to oversell. On the other hand, you've got actors to pay so you'd like to fill every seat. You set the total ticket capacity to 100.
You're offering four different ticket types—General Admission, Student, Senior, and VIP. You don't care what the distribution of GA, Student, and Senior tickets are so you don't put any limits on those. The VIP tickets come with a free puppy. You only have 10 puppies so you limit the number of VIP tickets to 10.
Now the hard cap is at 100 for the whole show; you can sell up to 10 VIP tickets; Students, Seniors, and General Admission folks all have a fair shot at a seat; and you haven't ticked-off the fire marshal. Take a bow.