Effect

Status effects are various conditions of a player or mob, which can be helpful or damaging. The majority are produced either by various Potions (including Splash Potions), and/or by various settings of a Beacon pyramid. Since snapshot 13w09b you are able to give yourself potion/mob effects by using the command /effect. Others are produced by monster attacks, certain food items, or specific game situations. A few effects are present in the game code, but are currently not produced in the game (unless the "custom potion" feature or  command is used).

Behavior
A living entity (player or mob) affected by a potion effect will be affected in various ways for an amount of time. As of 1.9 pre-release 2, players can open their inventory to see any current potion effects afflicted upon them and their duration. Also, as of 1.9 pre-release 4, players can see swirly particles emanating from their position in first person, and as of 1.9 pre-release 5(6?), this effect can be seen in third person and on players/mobs too.

Any number of different potion effects can be simultaneously active on a player, even in the case of opposite potion effects such as Strength and Weakness. It is not possible to apply the same potion effect multiple times, however, even if the effects are of different levels (e.g. Strength and Strength II cannot both be active at the same time). In the event of using a potion that applies an effect already active on the player, the new version of the effect overwrites the old effect, giving a new level and full duration, if the new effect is of equal or greater level. An attempt to use a potion that applies a weaker version of an already-active effect consumes the potion but does not apply the new effect.

All of these status effects (bad or good) are removed by drinking milk.

Parameters
Potion effects are given two parameters on creation: Duration and strength.