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As per question title, how does it work? What are the differences of being in a party or playing alone? Does it apply to finding orbs?

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up vote 3 down vote accepted

Magic Find is calculated using the Increased Item Quantity(IIQ) and Increased Item Rarity(IIR) of the player that gets credit for the kill. If a minion gets the kill, then any IIQ/IIR from support gems affecting that minion are applied first.

From my experience this also affects opening chest, so when we go out in a party, we usually have the person with the highest MF open the chests.

I think IIQ is the only stat that will give you more orbs, while IIR increases the rarity (color) of an item.

Edit Thanks to Kexlox for finding this information on IIQ in parties:

When in a party, each player in the party after the first gives a +50% item quantity modifier on drops.

Source: Mechanics Thread

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IIQ/IIR ? What's that ? – Anto Jan 30 '13 at 13:30
Increased Item Quantity and Increased Item Rarity. I'll update my answer to include this. – Coronus Jan 30 '13 at 19:09
Partying also provides a +50% boost to IIQ per player. So a party of 3 will find twice as many items as a solo player. – Kexlox Jan 30 '13 at 19:21
@Coronus thanks :) – Anto Jan 30 '13 at 22:28
@Kexlox I was not aware of that. Would you like to submit that as an answer, or do you mind if I incorporate it into mine? – Coronus Jan 30 '13 at 22:50

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