How does the merit sources pick posts for merits?
Before i could answer you on this, first read this thread and try to know about merits
https://bitcointalk.org/index.php?topic=2766177.0To add to what you have asked, ,merit is sent base on the viewers discretion, if you feels a post deserves being merited, you can give it to a quality post seen, this may not have to conform to others view or perception towards it, because merit should be given base on personal interest over a post, however we must be mindful of the kind of post we give merits to by reading the rules from the link above.
I see posts that is more qualified for merits but ignored while lower quality posts at being merited
Don't judge a post to be less of quality and another to be a quality one if you're not the merit sender, try to find a post also and merit it, another member may see it as undeserving type, merit is not moderated, but must not be abused.
or could it also mean there is favouritism in there?
No, and if you think you have an example, then push such forward for others to see.