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To clarify what others have said:

When a penalty kick is taken, only the kicker and the goalkeeper are allowed inside the penalty area. All other players must be outside the penalty area. They must also be behind the penalty spot, and at least 10 yards away from it. The 10 yard exclusion zone is similar to the same zone that applies to free kicks (since a penalty is a form of free kick), with the difference that it applies to all players, not just opposing players.

However, the penalty area is 18 yards deep, and the penalty spot is 12 yards deep. Therefore, at its nearest point, the spot is only 6 yards from the edge of the penalty area. To enforce the 10 yard zone, an additional marking is made on the field to denote that part of the zone that is outside the penalty area. A full circle isn't needed, since the players aren't allowed inside the penalty area anyway.

Finally, the arc is not part of the penalty area, and fouls committed inside it result in free kicks, not penalty kicks.