production - What is the science behind making actors appear different?

I know for LOTR, the long scenes in the house of Bilbo, they actually made two versions of it. One small one, and one big one. In the small one Gandalf would be too big, and in the other one Bilbo would be extremely small.

Using digital effects, and other techniques mentioned in the comments, these two can be merged together to get the effect they were after.

I also noticed in the extended edition of the Return of the King, that in the final scene were Frodo leaves, you clearly see body doubles walking towards the boat (proportions are different, they are clearly kids instead of adults).