The resource limit tool allows you to set a cap on resource production. It can be used to keep storage space from becoming full.
For example, logs, stone, iron, firewood, and coal are all stored in stock piles. If the town has a steady supply of logs, and isn't producing the other resources very quickly, the constant supply of logs would fill the stockpile and leave no room to store the other resources, such as firewood - which could then result in the townsfolk freezing to death.
While you can always build another stock pile or storage barn for more inventory, space, setting a resource limit can help keep storage from becoming overfull without expanding the town needlessly.
When workers don't work because a resource limit has been hit, they'll act as general laborers.
If storage becomes full, the event log will show a notification that there is no more room to store goods.
Conversely, if the amount of stored inventory is less than 10% of the set limit, the event log will show a notification that the resource is running low.
As your town grows, be sure to periodically increase the resource limits to fully support your town. With a high population and low food limit, starvation can occur.
Resource limits can also be accessed and set on individual buildings that produce a resource. From a crop field you can set the food limit, from a woodcutter you can set the firewood limit, and so on.