The Matrix represents the average persons’ sphere of reality, i.e. day-to-day life, the 9-5, whatever you like to call it. It’s a set of “rules”, in the movie, set down by the computers, IRL, set down by societal expectations.
Note how in The Matrix, there is emphasis on the daily grind, “the man” keeping the little guy down, the trite ways in which we entertain ourselves or “escape from reality” (night clubs, drugs, and so on), and the search for the answer in the outside world – little is done here that appears to be positive in any way, it is all just biding time.
Escaping the Matrix (the “red pill”) is a metaphor for looking inside yourself, recognising and letting go of the beliefs you hold which limit and filter your reality i.e. having the realisation that reality is infinite, and that the rules of The Matrix (your reality) are only limiting so long as you believe them to be.
Towards the end of the film, Neo can bend the rules of the Matrix to his will – only because he has “realised” that it is not real. Knowing is not enough, it is the realisation that matters. The red pill represents his first real step towards that realisation.