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NPC is an abbreviation for Non-Playing Character. They are computer controlled (or if you play on Battle.net server controlled). These are people that walks or stand still in the town. In most cases they have a purpose. In a few cases they have a decorative goal to simulate crowdedness.

Most NPCs serve a purpose. They can heal the player and his minions, repair the player's items, trade with the player and gamble with the player for Magic Items.