Capacity is the total number of tickets that you would like to sell for an event or performance - it is the max you will sell. You will need to set a capacity as part of creating a performance, but you can edit this number, via the performance management page, at any time if you would like to increase or decrease the maximum number of tickets you wish to sell.
Inventory is the maximum number each ticket type you would like to sell. In many cases this will be the same as your performance capacity, but my be less if you only want to sell a reduced number of a certain type of ticket.
The performance capacity will be the over-ridding determinant on the number of tickets you sell so you can set the ticket inventories for multiple ticket types at the capacity level without fear of overselling. See the following example for more information.
Your total event capacity is 100 - that is the max number of tickets you want to sell so you set your capacity at that.
You have an Adult and a Child ticket, both of which you set the inventories to 100 - this means you can sell any combination of adult and child tickets up to the 100 total capacity e.g. 70 adults and 30 children.
You also have a "VIP" ticket, but you only want to sell 20 of those max, so you set the inventory for those ticket to 20. These tickets are still covered by the 100 capacity so now your ticket sales may be something like 20 VIP, 60 Adults and 20 Child tickets. When the 100 capacity mark is reached via any combination of ticket sales, all tickets then show as sold out and no more are available to be booked.