An NPC is a Non-Player Character. Simply, these are A.I. (or computer) controlled characters. They can be generic civilians, shop keepers (sell/buy items), or monsters that you can slay.
NPCs are set to do a number of actions, namely the following:
1. Buying and selling items.
2. Giving us items (e.g quest items).
4. Attacking players. Attackers can be categorized as Hostile or Passive.
- a. If an NPC/monster is Hostile, it will attack you on sight. Some NPCs have a greater sight range, and therefore can begin their attack phase from a farther distance.
- b. If an NPC/monster is Passive, it will not attack you on sight. Passive NPCs will attack when provoked (as in attacking them).
5. Being a quest objective. Some NPCs must be spoken to or killed in certain quests.
6. Being pickpocketed. These NPCs can have money or items stolen from their unlimted supply of said things. All pickpocketable NPCs are passive, which makes obvious sense. There is a chance that the NPC will discover your thieverey and stun you for some damage. You will be unable to do any actions for a couple of seconds.