In the top-right corner of the Hangouts window is a light-grey-on-white button of a gear (along with other similarly-colored buttons). The gear indicates settings, which in this case means webcam, microphone, and speaker settings. From there you can set up your microphone better.

In my experience (though I believe other people have differing experience in this regard), once you find this button, you can get Google Hangouts to properly use any audio equipment that your computer and OS can recognize and use.

Google Hangouts refused to talk to my headset, FYI - it was the first time I'd used Hangouts and they helpfully don't have anything to do with devices or inputs anywhere I could find it on short notice.

How much notice did you have of the event?