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From the Matrix wiki
Morpheus (Laurence Fishburne) explains to Neo that the Matrix is an illusory world created to prevent humans from discovering that they are slaves to an external influence. Holding out a capsule on each of his palms, he describes the choice facing Neo:This is your last chance. After this, there is no turning back. You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth. Nothing more.
As narrated, the blue pill will allow the subject to remain in the fabricated reality of the Matrix; the red serves as a "location device" to locate the subject's body in the real world and to prepare him or her to be "unplugged" from the Matrix. Once one chooses the red or blue pill, the choice is irrevocable.Neo takes the red pill and awakens in the real world, where he is forcibly ejected from the liquid-filled chamber in which he has been lying unconscious. After his rescue and convalescence aboard Morpheus's ship, Morpheus shows him the true nature of the Matrix: a detailed computer simulation of Earth at the end of the 20th century (the actual year, though not known for sure, is approximately two hundred years later). It has been created to keep the minds of humans docile while their bodies are stored in massive power plants, their body heat and bioelectricity consumed as power by the sentient machines that have enslaved them.