what does capacity mean in that context?

When a user opens a channel it has to lock up some BTC. That is called channel capacity because for payments to be routed through that channel (even other people's payments) that channel at least needs to have the same or more amount of BTC available. If you want to route a bigger payment you need to find a channel with more capacity.

It's the amount of bitcoins currently in the network

So it's not a limit, it's the amount currently in the channel?

Think pre paid debit card split between two people