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On Android StudioClick Edit Icon to edit the AVD. Click Show Advanced settings. Change the Internal Storage, Ram, SD Card size as necessary. Click Finish.
Click Tools -> AVD Manager. Click the edit icon for the emulator. Click the Show Advanced Settings. Under Memory and Storage, reduce the Internal Storage, specify something like 2048MB for an emulator that comes with Google Play store or less for emulators without the Google Play Store.
Running multiple programs at once on your PC can cause performance issues. While running Android emulator for playing heavy games, you should always avoid using up the RAM of your computer. This will cause severe lag to your PC. You can close unwanted programs by going to "Task Manager".
This answer is, as I write this, nearly eight years old, and about five years stale. But it's still (as I write this) the "accepted" answer, because it answered the question when it was asked.
The newer answer, that applies to the newer Android Studio tools, can be found here: https://stackoverflow.com/a/35828035/62 -- it's a great answer with screen shots. If you're using Android Studio, ignore the Eclipse answer below.
I was searching for the answer to this question, and was unsatisfied with the above answers. But then I found the answer, so here it is for future reference:
To summarize (and clarify), in Eclipse, go to "Debug Configurations". You can find that in the drop-down under the "debug" icon. Select "target", and select a preferred emulator target to launch. Then under "additional emulator command line options," add this:
-partition-size 1024
Then CLOSE the emulator (and remove any devices), and click the debug icon, which will launch the preferred emulator you selected. This is important: Eclipse needs to launch the debugger, not AVD.
That fixed the problem for me.
Open the AVD Manager.
Click Edit Icon to edit the AVD.
Click Show Advanced settings.
Change the Internal Storage, Ram, SD Card size as necessary. Click Finish.
Confirm the popup by clicking yes.
Wipe Data on the AVD and confirm the popup by clicking yes.
Important: After increasing the size, if it doesn't automatically ask you to wipe data, you have to do it manually by opening the AVD's pull-down menu and choosing Wipe Data.
Now start and use your Emulator with increased storage.
Add the following to the avd config.ini
disk.dataPartition.size=1024MB
Let me know if this works for you also.
I added in the line 
Run AVD Manager
Select your AVD and click "Details..." button.
In my case AVD Manager sets disk size as
disk.dataPartition.size=4000M
This invalid value, disk is approx 500MB despite numbers specified.
Go to AVR's folder by path in "AVD details".
Edit it in config.ini to
disk.dataPartition.size=4000MB
and remove all .img files.
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