This effect takes its name from tilt shift lenses, which are a special type of lens where the front element can be moved resulting in just a narrow band of the photo being in focus. Traditionally, these lenses have been used for specialist reasons, such as photographing tool buildings without the vertical lines converging. However they're also commonly used for applying this miniaturization effect.
The lenses themselves are relatively expensive, but thankfully it is quite an easy effect to replicate in an image editor like Paint.NET. To follow along with this tutorial, you'll need a copy of Paint.NET, and you'll also need to download and install the free Alpha Mask Import plugin, but I'll explain more about this in the first step.