Blurring parts of the photo simulates the shallow depth of field normally encountered in close-up photography, making the scene seem much smaller than it actually is; the blurring can be done either optically when the photograph is taken, or by digital postprocessing.
Many diorama effect photographs are taken from a high angle to simulate the effect of looking down on a miniature.
Last week, I went to Cameron Highlands and took some photos from high angle. From the photos, I use this online free software, Tilt Shift Maker to create the illusion. To make it more convincing, I did some final touching using Photoshop and Lightroom.