You're right on both counts — there is a population cap, and the game did a poor job explaining it. Here's the deal: population is limited by your housing (each Hut/Tower adds capacity), with an overall ceiling on top. And population only boosts production up to a soft limit — past a few hundred, extra population is mostly cosmetic, so that hard wall at the top was mainly just confusing.
I've just changed it: instead of slamming into a wall, population now eases in and grows more gently as it nears the limit, so it feels natural rather than like an invisible brick wall. I'm also going to surface it on-screen (Population X / Y, with a hint that housing raises it) so it's never a mystery again. Thanks for the nudge — this is exactly the kind of feedback that makes the game better!