You will have to choose the PHP extension (.php) when you want php code to be executed in the file. PHP code is code between the opening <?php or <? and the closing ?> tags.
When no PHP code should be executed you can use the .html extension.
Usually when using the .php extension you are telling the web server, that it should use a php interpreter to process the file before it will be delivered to the browser. The php interpreter will then replace all content between the <?php and ?> by the output of the PHP code. Just as if you wrote it manually. The processed file will then be delivered to the browser.
However, using the .php extension to tell the web server to process php code is configurable. If you want you can use other file extensions too.
There is another thing that should be pointed out. When you only type the url path (without a filename) like :
http://www.myserver.com/
there is an order of extensions (filenames) which the webserver (apache) searches for an index document. For example an apache config may contain a section like:
<IfModule mod_dir.c>
DirectoryIndex index.html index.cgi index.pl index.php index.xhtml index.htm
</IfModule>
Meaning that the index document is searched in the order above. This means if you place an index.html and a index.php in the same folder – and having the configuration above – always the index.html would be delivered by the server.