The aim of the study was to evaluate the substitution of production factors and its impact on the total cost of production in the commercial farms specializing in milk production. The research method was the production function Cobb-Douglas. The value of the Marginal Rate of Substitution of capital for labour and amount of the total costs were presented, depending on the level of the labour input. It has been shown that substitution of production factors contribute to the reduction of production costs on farms specializing in milk production, allowing them achieve competitive advantage.