Here's my understanding of a simplified explanation of power lapse.

Normally aspirated engines have a power decrease that is roughly linear with the density ratio sigma, where sigma is the ratio of the density at the current altitude to the density at sea level.

So at a given altiude, the total power available is roughly sigma*P0, where P0 is the sea level total power. This total power includes the power "wasted" in keeping the engine running, i.e overcoming bearing friction, running fans and accesories, etc.

Lets say for the sake of argument that a .40 engine puts out 1HP, and uses 0.15HP to keep going. So the total power is 1.15HP

So at 10,000 ft, where the density is 95% of that at SL, the total power available is 1.15*.95=1.09HP. Subtract off the no-load power of .15 HP, and we have a power available of .94 hp, for a 6% loss in power.

At higher altitudes, this becomes more and more of a problem, until eventually, the engine can produce no useful power because the air available only provides enough power to keep it ticking over. When this altitude is exceeded, the engine quits.