-------EDIT--------

Android Studio 2.0 and above, you can create/edit this file by accessing "Edit Custom VM Options" from the Help menu.

-------ORIGINAL ANSWER--------

Open file located at

/Applications/Android\ Studio.app/Contents/bin/studio.vmoptions

Change the content to

-Xms128m-Xmx4096m-XX:MaxPermSize=1024m-XX:ReservedCodeCacheSize=200m-XX:+UseCompressedOops

Xmx specifies the maximum memory allocation pool for a Java Virtual Machine (JVM), while Xms specifies the initial memory allocation pool. Your JVM will be started with Xms amount of memory and will be able to use a maximum of Xmx amount of memory.

Save the studio.vmoptions file and restart Android Studio.

Note:

If you changed the heap size for the IDE, you must restart Android Studio before the new memory settings are applied. (source)

I looked at my Environment Variables and had a System Variable called _JAVA_OPTIONS with the value -Xms256m -Xmx512m, after changing this to -Xms256m -Xmx1024m the max heap size increased accordingly.

Or, you can go to your android-studio\bin folder and change these -Xmx and -Xms values in studio.exe.vmoptions or studio64.exe.vmoptions files (depending on which version you are running).