I always assumed that NPCs represented mroe than one actual citizen, because otherwise the world would become far to cluttered, and teh system requirements far to high to manage literally thousands of NPCs that exist for no reason.
Yeah, from a historical perspective it makes sense to cut down. Maybe not really as of Skyrim and later games, though. GTA games, including ones almost a decade older than Skyrim, manage to have a fairly reasonably high "population" of NPCs.
GTA and Skyrim are very different games and therefore need a different approach. GTA has some key characters which drive the story. The other NPCs are 'set dressing': fairly simple, nothing interesting to say, don't have a home. They are just spawned in where needed. Skyrim has a different approach. Except soldiers/guards pretty much every NPC has a 'life': they have daily routines, unique voice lines, a place to sleep and go there every night - except they are on a quest themselves.
GTA and Skyrim go for a different feeling, which is why they need different solutions.
You're aware nearly every npc has a name I wager? Those who aren't are typically guards or bandits, half the NPCs in any given tavern have names but don't have quests associated with them
I recall ages ago having read a theory about this concept of compression. That most game worlds that we see aren't literal, but rather are compressions of the world that characters experience. A city that we see might have just 5 streets, but that's just the city being compressed to a manageable size. For what characters experience, there'd be hundreds of streets. And same thing for NPCs, as you put it. We mostly only see the important NPCs and a small sample of others, but there's many NPCs that really are there for story telling purposes, they just aren't shown.
It's a really good technique if pulled off well. After all, it's really hard to have cities in game. You have to do something to limit it. Either padding it out, making most of it unvisitable, "compressing" it, or... just not having cities. Every option has downsides, but at least the compression approach optimizes for gameplay and your time.
Starfield proves that with New Atlantis. Its annoyingly huge, spread out pointlessly (for gameplay purposes, obviously a capital city is going to be huge lore/realistically), and is all around irritating to find stuff in.. As an example
We want cities that feel big and vast, while being manageable and navigable for players playing a game.
We want cities that feel that are full of life and bristling with NPCs, without actually having so many NPCs that that you'd need a cray supercomputer to process it all.