So what happens if a government steps in and buys a bunch of btc. If they were to hold on to all their coins. How would that affect the value of btc for the average consumer.
The value would go up, the same as if anyone else bought a lot of bitcoins.Would people start using smaller btc so they don't have to pay the value that said government wants for their coins?
I'm not sure what you mean. The government can't sell bitcoins for more than what people would be willing to pay on the open market (and can't buy bitcoins for less than what people are will to sell for). This is true of any currency, not just Bitcoin.I like the idea that it's very hard for one person to control all the btc. Am i correct about this?
Yes, in a way, because the more you want to buy, the higher the price per bitcoin becomes, since you can only buy bitcoins if you can find people willing to sell them, and some people are not willing to sell unless an extremely high price is offered (and some people might be unwilling to sell at any price). However, the same is true of any limited commodity. 
