There several things you need to understand before buying a digital camera:
1) Quality of the image or pictures.
Let's begin with the last item. While the price of digital cameras is getting lower and lower your bang for the buck is still better with a camera that uses film. Why? Only the most expensive and professional of digital cameras will take different lenses, allow you to actually look through the lens (TTL) that is taking the picture, as well as checking the exposure (amount of light needed to make a perfect picture) from that same, most ideal position. In a film camera you can get these.
Still, these slighly more difficult to operate cameras allow you to use different film (for better sharpness, or for picture taking in lower light), add extra lenses (to capture a wider area or zoom in close on a distant object) and even photograph small objects (macro photography, for coins, stamps, documents, flowers, insects or medical work such as dental photography of the teeth). You won't find this flexibility in a digital unit until you spend over $1000.
Most low priced digital cameras are very easy to operate. They are generally point and shoot. But, for under $200 you won't get a digital camera that delivers picture quality much better than a $12 one-use Kodak film camera you can buy at any grocery store! That 27 exposure $12 wonder actually has a coated glass lens (those $7 one-use cameras you also find, have a low quality molded plastic lens that can generate a rainbow fringe around bright objects or even across the entire image)! It is fixed focus, giving you a shooting range from as close as five feet to as far as the eye can see. But, the further away you get the less detail will show clearly. Furthermore, that $12 wonder has a small built in electronic flash -- just like a $200 digital camera!
The one edge with a digital camera is that if you take lots of pictures each year (more than 8 rolls of 35mm film) you will save money. You can also transfer your pictures to most computers within minutes. With a film camera you must first take all 27 pictures, then pay another $10 for one hour processing or if you don't mind waiting 3 days you can drop this price to $4. Even the lowest cost digital camera offers better compensation for dim or bright lighted scenes (they have some type of light metering device on the camera, unlike the $12 point and shoot).
You can still get comparable film cameras that offer similar features to digital cameras at a far lesser cost. Film cameras run from about $75 to $250 for a rangefinder camera (you see the view through a separate, smaller lens above the actual picture taking lens, which introduces a serious problem for photographers called paralax -- which means you don't see exactly what the camera sees, so you often cut a family member from a group shot). Similar digital cameras start around $125 and go up to over $1000. At $1000 for a digital camera you are just starting to get the picture quality of a $150 film camera!
Quality of the image (the ability to make large, detailed prints) is determined by the number of pixels (picture elements) in a digital camera and you don't get many pixels under $1000. This actually puts the lower priced digital cameras into the old 110 (the palmatic-instamatics) that were popular between 1970 and 1985. These had little half-inch width film inside a small plastic cartridge and you couldn't make a print much larger than 5 x 7 before you started to see dots (pixels) all over the place. It's the same thing with a low cost digital camera. They will deliver a nice wallet size image, but if you want to increase their size and print an 8 x 11 glossy print you will start to see jagged edges and the detail of faces will start to look like an arcade game image.
You need to generally get around two million (or mega) pixels before you can make a great quality 8 x 11 and you need to approach 5 mega pixels to make super large (multi-sheet) posters.
In short, an under $500 digital camera is fine for snap shots, but not much more. But, you will still save in film costs!
One factor to really look at and consider in a digital camera is the ability to store pictures on little cards that slip into the camera. Why? Well, we had a digital camera lock up on us and the only way to clear that camera was to pull the plug or ship it back to the manufacturer (facing the loss of all your pictures that are stored internally). Having the pictures stored on an external (memory) card can allow you to keep the card and then put it back into the camera after it has been serviced. It also allows you to take more than 15 high quality (or 30 low quality) pictures -- which most users would like to do, especially on a vacation!
Another consideration that you may not be able to get around easily in the lower priced cameras is the flash. These flash units are low powered and too close to the lens. At this distance a condition called red eye occurs, because the light from the flash strikes the eyes of your subjects lighting up the retinal area behind the eye (which is red in color). To eliminate red eye you have to move the flash unit about one foot away from the camera -- off to the side works best. This means you may need to look at cameras with the ability to use external flash units or those that have a detachable flash. Also the power of the flash determines how far from the subject you can stand. Small, low powered flash units limit you to about 8 feet.
If you want the sharpest of pictures you will need to look at a camera that either has automatic focus or allows you to manually set the focus (rangefinder). The ease of operation begins to diminish the moment you move to a camera such as this! The ability to focus the image generally allows you to move in closer than 5 feet (which is usually the limit on a fixed-focus camera -- and even at this range the pictures are not as sharp as it would be at longer distance, such as 10 feet).
Finally, if you want to take better scenery shots you need to consider a digital camera with a built in zoom lens. When you move into this type of a camera the price goes up and other factors, such as amount of pixels (picture quality) and internal storage (number of pictures) goes down. So, it's going to be a trade-off. Cost against quality just to get a zoom image and bring those distance landscapes a little closer (even though they won't be too sharp unless you spend more to increase the amount of pixels).
For a point and shoot snapshot taker who doesn't care if the picture is a little fuzzy and takes at least 130 pictures a year, a small $100 - $200 digital camera is probably a good deal.
If you don't intend to make lots of big enlargements, a digital camera in the $300 - $700 range will deliver good quality standard size pictures (3 x 5) with sharpness close to a film camera and no more $10 per roll for film and processing (which can add up if you take a lot of pictures).
For a person who likes to do more professional quality of work with a camera, unless you're going to venture into the thousand dollar plus range, you probably need to stick with good old fashioned film for the hear and now.
Prices are going down and quality is coming up. By this time next year who knows what you can find for $350 in the digital world. Unless you need instant gratification, wait and see what happens!