There are two modifiers that affect drop rates in the game, increased item rarity, and increased item quantity.
There are three potential sources of these modifiers:
- the player (skills, passives, gear etc.)
- monsters (such as bosses and champions)
- Party bonuses
Modifiers from the player stack additively with each other, and are subject to diminishing returns. Modifiers from the party bonus and monsters stack additively with each other, and are not subject to diminishing returns. The total player bonus stacks multiplicatively with the total party & monster bonus.
Increased Item Rarity
Increased Item Rarity % modifiers increase the chances of an item being magic, rare, or unique. For example with a total of +100% increased item rarity, you'd get twice as many magic items, twice as many rares and twice as many uniques from normal enemies.
This modifier has no effect on the number or type of currency items, scrolls, or gems that drop since they have no rarity like normal, magic, rare or unique.
Increased Item Quantity
This modifier increases the average number of items that drop from monsters. It does not affect the type, quality, or rarity of item dropped, only the chance that something will drop. There is no cap on the usefulness of this modifier, as monsters can drop more than one item at a time.
The base chance for an item to drop from a normal monster is 16%. This varies between monster types, and special monsters have higher drop chances.
When in a party, each player in the party after the first gives the equivalent of +?% item quantity modifier on drops. The party bonus as well as the any bonus the monster gives are additive with each other and multiply with the quantity bonus of the player who gets the killing blow. 
There is a penalty to the chance of currency items and Divination cards dropping in areas with a monster level more than two levels lower than your character level. For each additional level that you have compared to the area's monster level+2, the chance of a currency and Divination card item drop is reduced by 2.5%.
So if you are level 30 in a level 20 area, you will see 20% less currency and Divination card item drops on average:
A level 30 character in a level 28 area will see no penalty.
Currency and Divination card drops are not increased or decreased in this way when fighting in areas above your level.
Modifiers on Gear
Increased Item Rarity / Quantity mods on gear do not affect drops from chests.
- Mark_GGG (August 2, 2013 4:05 AM). "Are Orbs Drops effected by Item Quantity". Path of Exile Forum. Retrieved August 2, 2013.
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- Malice (November 14, 2011 12:02 AM). "Mechanics thread". Path of Exile Forum. Retrieved February 15, 2013.
- Chris (January 23, 2013 1:31 AM). "0.10.0 Patch Notes". Path of Exile Forum. Retrieved April 09, 2013.
- Rhys (August 28, 2012 4:26 AM). "Vaults of Atziri feedback". Path of Exile Forum. Retrieved April 29, 2013.