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If I reach left-most end of a line and press left-arrow it doesn't take me to the previous line.

Similarly, if I keep pressing right arrow, the cursor keeps going towards infinity, without ever moving to the next line.

How do I change this behavior to desired one?

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Find Tools -> IDE Options -> Editor (in OSX it's Preferences -> Editor). In the area entitled "Virtual Space" uncheck "Allow placement of caret after end of line". Click "Apply" and you're good to go.

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See also my reply to the same question at StackOverflow: stackoverflow.com/questions/4493697/…. –  CrazyCoder Aug 23 '11 at 11:07
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