To me, shyness is a personality trait. Its someone who prefers to listen rather than speak because they are slightly unsure of themselves. They might get a flutter of a butterfly in their stomach when they are the center of attention. Given the choice, they will stay out of the spotlight. But shy people are still capable of living a normal life. They can still 'survive' social interaction. I was shy when I was a child. At one point in middle school, I believe my shyness developed into something much worse... Social Anxiety Disorder.
SAD, in my opinion, develops usually from naturally shy people, who undergo and experience traumatizing situations (concerning social interaction) and then the brain, either gradually or abruptly, conditions itself into fearing social interaction, intensly. Its a protection mechanism. The brain (or mind) doesn't want to get hurt as it has in the past. Over years I believe the conditioning can get worse if not dealt with, and the fears and self-consciousness will get more and more irrational and intense. Another thing that defines SAD from shyness is avoidance. That is a big defining trait. Shy people are uncomfortable, but they still manage to accomplish things in life that require social interaction. Such as school, jobs, making friends.. People with SAD tend to avoid these situations, to the point where it can become a phobia. I avoid phones and ordering food like the plague, its developed into a phobia. I will suffer full fledged panic when introduced into these situations. A shy person will not, they will only get slightly uncomfortable.
I apologize if my theory is a little long, but I spend a lot of time trying to verbalize the difference, as most normal people can't grasp the difference. And still don't.