Psychoacoustics has a fairly simple definition - it is the psychological study of hearing.
Psychoacoustic research aims to find out how hearing works - how sounds entering the ear are processed by the ear and brain to give the listener an impression of what happens in the outside world. Whereas biology mainly focuses on the physical part of hearing, Psychoacoustics deals with the psychological part - what happens with the signals after they have found their way to our ear.
Psychology has nothing to do with the normal concept of psychology (such as personality disorders etc).
Psychoacoustic scientists are not bothered with how sounds produce a particular emotional or cognitive response. (That is for the field of cognitive psychology).
Instead, psychoacoustic science is interested in how the ear manages to filter sounds (how can you filter out other voices when you listen to somebody, even when, say, five people speak with the same volume?). Also, how does an ear manage to hear a tone, and determine which tone it is? (perfect pitch)? And how do we manage to localise sounds in space?
Psychoacoustics is used in the science of sound and music. The conversion from mono to stereo and from stereo to surround have nothing to do with psychoacoustics. If you have ever heard "virtual surround", that is very much a part of the psychoacoustics science, as that deals with how sound can be changed to change its psychological perception.
The science of sound filtering in the brain is also important for when it comes to hearing aids. Hearing aid amplifies the whole sound band. To the listener, the background noise actually sounds as loud as the speaker. This is a serious problem to people with these types of hearing disabilities, and a problem psychoacoustics tries to address.
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