It was the young Reds' fifth game in the end-of-season mini-league and the loss is a blow to their hopes of becoming national U18 champions.
The Gunners opened the scoring from the spot when George Johnston was ajudged to have handled in the penalty area, but Neil Critchley's team levelled through a spot-kick of their own when Adam Lewis netted after he was brought down.
Liverpool played well and controlled the match for long periods but another penalty led to Arsenal taking a 2-1 lead just after half-time.
With the Reds pushing forward in search of an equaliser they left themselves open at the back, and the Gunners scored on the counter-attack before yet another spot-kick earned them a 4-1 win.