The recent long-look X-ray observations of TeV blazars have revealed many important new features concerning their time variability. In this paper we suggest a physical interpretation for those features based on the framework of the internal and external shock scenarios. We present a simplified model applicable to TeV blazars and investigate through simulations how each of the model parameters would affect the observed light curve or spectrum. In particular, we show that the internal shock scenario naturally leads to all the observed variability properties, including the structure function, but for it to be applicable, the fractional fluctuation of the initial bulk Lorentz factors must be small, sigma'(Gamma) = sigma(Gamma)/Gamma(avg) << 0.01. This implies very low dynamical efficiency of the internal shock scenario. We also suggest that several observational quantities such as the characteristic timescale, the relative amplitude of flares as compared to the steady ("offset") component, and the slope of the structure function can be used to probe the inner jet. The results are applied to the TeV blazar Mrk 421, and this, within the context of the model, leads to the determination of several physical parameters: the ejection of a shell with average thickness of similar to10(13) cm occurs on average every 10 minutes, and the shells collide similar to10(17) cm away from the central source.